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VALUATION  OF  PUBLIC 
UTILITY  PROPERTIES 


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Metallurgical  and  Chemical  Engineering  Power 


VALUATION  OF  PUBLIC 
UTILITY  PKOPEETIES 


BY 

HENRY  FLOY,  A.  B.,  M.  A.,  M.  E. 

CONSULTING   engineer;    MEMBER    AMERICAN    INSTITUTE     OF    ELECTRICAL 
ENGINEERS,    AMERICAN   SOCIETT    OF    CIVIL   ENGINEERS,   ILLUMI- 
NATING  ENGINEERING   SOCIETT,    NEW   YORK    ELEC- 
TRICAL SOCIETY,   ETC. 


McGRAW-HILL    BOOK   COMPANY 

239  WEST  39TH  STREET,  NEW  YORK 

6  BOUVERIE  STREET,  LONDOX,  E.  C. 

1912 


J  ^  ^ '  ^ 


T663 


M 


Copyright,  1912 

BY   THE 

McGraw-Hill  Book  Company 


PRINTED  AND   ELECTROTYPED 

BY  THE    MAPLE   PRESS 

YORK,    PA. 


PREFACE 

At  the  present  time  there  exists  no  general  practice  or  well 
formulated  theory  of  the  valuation  of  utility  property.  This  is 
indicated  by  the  generally  confused  state  of  the  public  mind,  the 
divergent  views  of  those  engaged  in  the  work,  and  the  contradic- 
tory positions  taken  by  the  public  authorities  and  courts  as  to 
the  proper  basis  of  valuing  such  property. 

Much  important  information  relating  to  valuation  work  exists 
in  various  public  papers,  but  heretofore  there  has  been  no  com- 
prehensive attempt  to  digest  and  compile  this  material. 

The  author  has  been  engaged  for  several  years  past  in  valuing 
property  aggregating  hundreds  of  millions  of  dollars.  He  has 
devoted  much  time  to  the  study  of  the  opinions,  papers,  discus- 
sions, reports  of  commissions,  and  court  decisions  relating  to  the 
subject.  He  has  endeavored  in  this  book  to  digest  this  material, 
in  so  far  as  possible  and  to  present  a  summary  of  the  best  practice, 
with  typical  examples  thereof.  The  aim  has  been  to  indicate, 
if  possible,  the  line  along  which  theory  and  practice  seem  likely 
to  be  standardized. 

No  attempt  is  made  to  hold  a  brief  either  for  the  necessity 
of  valuing  property  on  the  one  hand,  or  the  injustice  of  doing 
so,  on  the  other.  The  work  relates  rather  to  approved  methods 
of  ascertaining  values  not  only  of  tangible  property,  but  of  m- 
tangible  property  as  well.  It  treats  of  appraisals  which  have 
become  more  or  less  historic,  and  have  helped  to  establish  the 
precedents  of  current  practice. 

Since  it  frequently  happens  that  the  valuations  of  utility 
property  are  submitted  to  the  scrutiny  of  the  courts,  references 
are  frequently  made  in  this  book  to  the  judicial  rulings -which, 
though  at  times  contradictory  and  somewhat  confusing,  never- 
theless indicate  the  general  lines  along  which  valuations  must  be 
made  in  order  to  render  then  unassailable. 

The  author  has  made  use  in  the  preparation  of  this  work,  of 
papers  which  he  has  previously  presented  before  engineering 
s"bcieties.     These,  however,  have  been  revised  and  elaborated. 


211574 


vi  PREFACE 

Many  other  sources  of  information  have  been  drawn  upon, 
for  which  the  author  has  endeavored  to  give  credit,  with  due 
appreciation  of  the  assistance  and  co-operation  rendered  by  the 
various  members  of  the  accounting  and  engineering  professions 
interested  in  this  subject. 

Henry  Floy. 
New  York  City, 
April  2,  1912 


CONTENTS 

Page 
PREFACE    V 

CHAPTER  I.— Introduction 1 

General — Purpose — Sale  or  Transfer — Fixing  rates — Capitalization 
— Taxation — Accounting — Basis. 

CHAPTER  II.— Glossary 13 

Application  of  terms — Nature — Physical  value — Scrap  value — 
Wearing  value — Service  value — Present  value — Original  cost — 
Cost  to  replace  new,  replacement  cost  or  cost  of  reproduction — 
Development  expenses— Fair  rate,  fair  value,  fair  return — Good 
will — Franchises — Depreciation — Classes  of  depreciation — Going 
value — Public  utility — Averages. 

CHAPTER  III.— Public  Service  Commissions 32 

Utility  commissions — Reasons  for  the  creation  of  commissions — 
Results  accomplished  by  commissions. 

CHAPTER  IV.— Making  an  Appraisal 49 

General — Cost  of  Appraisals — Inventory — Field  inspection — Sug- 
gested procedure. 

CHAPTER  v.— Structur  al  Costs 62 

Unit  prices — Contractor's  profit — Fluctuating  prices — Engineering, 
contingencies,  omissions,  etc. — Real  estate — The  sales  method — 
Calibration  of  sales  method — Final  re\'ised  values — Block  131 — 
Part  of  Block  126 — Paving — Water  power. 

CHAPTER   VI. — Development  Expenses,   Intangible   Expenses, 

Non-physical  Costs,  Overhead  Expenses 91 

General — Interest — Taxes — Insurance — Legal  and  organization 
expenses — Cost  of  financing — Working  capital — Non-existant 
property. 

CHAPTER  VII.— Franchises,  Good  AVill,  Going  Value,  Contracts  129 
Franchises — Good  will —  Going  value — Application  of  principles 
outlined — Assumptions  as  to  existing  plant — Date  of  valuation — 
Construction  period  required — Going  value  development  period — 
Beginning  of  operation — Character  of  plant  and  order  of  construc- 
tion— Beginning  of  operation  of  different  portions  of  comparative 
plant — New  construction  in  going  value  development  period 
ignored — Operations  of  comparative  plant — Income  on  unemploy- 
ed capital — Resulting  going  value  under  first  trial  computation — 
Recomputation  unnecessary  for  the  purpose  of  this  paper — Effect 
of  assumptions  as  to  order  of  construction  on  loss  of  interest  during 
construction  item — Contracts. 

vii 


viii  CONTENTS 

Page 

CHAPTER  VIII.— Depreciation       168 

General — "Absolute"  and  "theoretical"  depreciation — Depre- 
ciation accounts  or  reserve  funds — Application  of  depreciation — 
Appreciation — Fifty  per  cent,  method — Depreciation  of  non- 
physical  values — Summary. 

CHAPTER    IX. — Appraisals    of   Public    Utility    Properties    in 

Greater  New  York      218 

Third  Avenue  Railroad  Company — Metropolitan  Street  Railway 
Company — Coney  Island  and  Brooklyn  Railroad  Company — 
Kings  County  Lighting  Company. 

CHAPTER  X. — Examples  of  Important  Appraisals 333 

Street  railway  properties  in  Chicago — Union  Electric  Light  and 
Power  Company,  St.  Louis,  Mo. — Macon  Gas,  Light  and  Water 
Company,  Georgia — Northern  Pacific  Railway,  State  of  Washing- 
ton— Beloit  Water,  Gas  and  Electric  Co. 

INDEX ■ 387 


VALUATION  OF  PUBLIC 
UTILITY  PROPERTIES 


CHAPTER  I 
INTRODUCTION 


General. — ^Fifteen  or  more  years  ago,  the  appraisal  or  valuation 
of  corporation  property,  was  unusual.  Inventories  of  supplies 
and  apparatus  for  stock-taking  or  insurance  purposes,  were 
common,  but  valuations  of  property,  in  the  sense  that  term  is 
used  at  the  present  day,  as  the  basis  of  sale,  capitalization,  taxa- 
tion or  the  determination  of  proper  rates  to  be  charged  for  the 
service  rendered,  were  unusual.  The  taking  over  by  municipal- 
ities of  privately  owned  water  works  may  be  said  to  have 
originated  the  present  era  of  appraisals  and  valuations  in 
America.  Consequently  the  water-works  engineers  were  the  first 
of  the  profession  to  be  drawn  into  this  department  of  engineering 
and  they  have  done  much  excellent  pioneer  work  therein.  More 
recently  there  has  developed  a  frequent  and  importunate  demand 
for  the  determination  of  the  value  of  corporation  property,  in  all 
lines,  particularly  that  of  so-called  public  utilities  which  has 
called  for  the  services  of  other  experts. 

A  very  usual  and  normal  method  of  ascertaining  the  value  of 
privately  owned  property,  is,  and  has  been,  to  consider  its  net 
earnings  in  the  present  and  its  prospects  for  their  increase  in  the 
future.  It  was  customary  to  apply  this  same  method  in  estimat- 
ing the  value  of  public  utility  properties,  overlooking  the  fact 
that  their  operation  and  control  was  specifically  limited  by  fran- 
chises and  special  laws  under  which  they  were  originated, 
and  that  as  quasi  public  organizations  they  were  under  obliga- 
tions which  did  not  apply  to  small  competitive,  private  concerns. 
Individual  initiative  and  the  net  profits  accruing  therefrom,  in 
the  case  of  industrial  organizations,  are  largely  modified  and 

1 


2  VALUATION  OF  PUBLIC  UTILITIES 

restricted  through  competition,  but  no  such  limitation  exists 
with  respect  to  a  corporation  controlling  a  monopoly.  The 
history  of  corporate  control  and  operation  of  public  utilities 
discloses  the  fact  that,  in  very  many  cases,  monopolistic  control 
was  used  unfairly  for  the  purpose  of  unduly  increasing  earnings, 
at  the  expense  of  the  public,  to  permit  flotation  of  securities  for 
the  enrichment  of  the  individuals  controlling  the  corporation. 

The  necessity,  in  certain  cases,  for  ascertaining  the  amount  of 
over  capitalization  of  corporations  serving  the  public  regardless 
of  whether  the  over  capitalization  results  from  ignorance,  mis- 
management or  necessity,  has  developed  the  recent  movement 
for  ascertaining  the  real  value  of  the  property,  ''both  used  or 
useful"  in  serving  the  public.  This  necessity  of  ascertaining  in 
individual  cases  the  value  of  corporation  property  has,  as  so 
often  occurs,  extended  until  there  is  a  very  definite,  though 
unnecessary,  demand  for  the  appraisal  of  all  physical  property 
used  by  public  utility  corporations,  as  if  that  were  the  whole 
measure  of  value.  This  extreme  view  is  unwarrantable  and 
would  result  in  a  useless  amount  of  effort  and  expense  with  no 
necessary  accompanying  gain.  At  the  same  time  there  are 
occasions  where  appraisals  of  corporation  property,  both  physical 
and  intangible,  are  necessarj^  and  essential  to  permit  a  judgment 
as  to  the  value  of  its  securities  or  the  fairness  of  its  earnings. 
That  this  conclusion  is  correct  is  indicated  by  the  very  reasonable 
and  common  sense  opinion  of  the  Railroad  Securities  Commis- 
sion, expressed  in  their  recent  report  to  the  President.  The 
quotation  gives  a  very  just  and  adequate  expression  of  the  place 
and  importance  a  physical  appraisal  should  hold. 

"In  so  far  as  the  value  of  the  property  is  an  element  in  rate  regulation 
the  outstanding  securities  are  of  so  little  evidentiary  weight  that  it 
would  probably  be  of  distinct  advantage  if  courts  and  commissions 
would  disregard  them  entirely,  except  as  a  part  of  the  financial  history 
of  the  property,  and  would  insist  upon  direct  evidence  of  the  actual 
money  invested  and  of  the  present  values  of  the  properties.  For  this 
and  other  reasons  discussed  in  the  body  of  the  report,  your  Commission 
recommends  that  the  Interstate  Commerce  Commission  should  have 
authority  and  adequate  funds  to  make  a  valuation  of  the  physical 
property  of  railroads  wherever  the  question  of  the  present  value  of  these 
roads  is,  in  the  judgment  of  that  Commission,  of  sufficient  importance. 
It  is  hardly  necessary  to  add  that  your  Commission  does  not  believe' 
that  the  cost  of  reproduction  of  the  physical  properties,  however  care- 
fully computed,  is  the  sole  element  to  be  considered  in  determining  the 


INTRODUCTION  3 

present  value  of  a  railroad,  or  that  the  outstanding  securities  could  or 
should  be  made  to  conform  to  any  such  arbitrary  standard. 

"If  railroad  securities  were  to  be  issued  only  after  express  authoriza- 
tion of  each  particular  issue  by  the  Interstate  Commerce  Commission  or 
other  governmental  agency,  it  is  difficult  to  see  how  the  Government  can 
thereafter  escape  the  moral,  if  not  the  legal,  obligation  to  recognize  these 
securities  in  the  regulation  of  railroad  rates.  In  view  of  the  vast  extent 
of  the  railroad  systems  of  this  country  and  the  magnitude  of  the  financial 
interest  involved,  iDOth  on  the  part  of  the  railroads  and  of  those  who  pay 
the  rates,  your  Commission  believes  that  the  possible  consequences  of 
such  a  system  of  regulation  are  too  serious  to  warrant  its  adoption  at  the 
present  time."* 

One  of  the  causes  of  inquiry  as  to  property  values  has  resulted 
from  a  growing  conviction  that  through  unfair  promotion,  loose 
methods  of  financing,  lack  of  proper  maintenance  of  property  or 
the  rapid  improvement  and  development  of  machinery,  which 
has  necessitated  the  abandonment  of  the  old  faster  than  its  cost 
could  be  written  off  as  a  part  of  operating  expense,  capitalization 
did  not  represent  or  even  approximately  indicate  the  real  value 
of  the  property  fairly  entitled  to  be  considered  in  case  of  sale  or 
the  basis  on  which  to  figure  earnings.  Over  capitalization  may 
arise  from  a  variety  of  causes.  It  may  have  come  about  in  an 
entirely  innocent  way,  as  in  some  instances  it  is  the  result  merely 
of  ignorance;  freciuently  it  has  been  well-intentioned  and  even 
proper  and  necessary  in  order  to  rehabilitate  worn-out  or  super- 
seded property,  funds  for  which  could  not  be  provided  out  of 
operating  income;  but  in  many  cases,  at  least  in  connection  with 
public  utilities,  it  is  the  outcome  of  intentional,  fictitious  and  un- 
warranted increase  in  securities  through  the  putting  out  of 
stocks  and  bonds  for  the  purpose  of  immediate',  but  what  has 
now  come  to  be  considered,  unfair  profit. 

There  is  much,  evidently  sincere  but  nevertheless  mistaken 
opposition  to  the  application  of  any  method  or  theory  of  appraisal 
for  determining  physical,  intangible  or  complete  going  values  of 
public  utility  properties.  Yet  it  must  be  clear  that  the  amount 
of  outstanding  securities,  their  market  value,  the  earnings  of  a 
corporation  or  the  book  costs  of  its  property  without  considera- 
tion of  what  depreciation — if  any — has  taken  place  in  physical 
property,  do  not,  of  necessity,  indicate  even  approximately 
whether  the  capitalization  of  a  public  utility  is  proper  or  im- 

'  Report  of  the  Railroad  Securities  Commission,  1911.     Pages  38-39. 


4  VALUATION  OF  PUBLIC  UTILITIES 

proper.  ''Cost  is  not  synonymous  with  value,"  capitalization 
may  be  artificially  large  or  small  compared  with  the  fair  value, 
income  may  be  excessive  or  insufficient  to  take  care  of  proper 
charges,  depending  on  rates,  and  the  proper  basis  for  determining 
these  questions  in  relation  to  public  utility  property  at  least,  is  an 
appraisal  of  both  tangible  and  intangible  values.  Physical 
valuation  alone  will  not  give  the  total  fair  value  but  it  will  usually 
give  a  relatively  large  proportion  of  the  whole. 

As  illustrating  the  value  that  may  attach  to  the  non-physical 
part  of  a  property,  the  testimony  of  Mr.  Andrew  Carnegie, 
recently,  before  a  Congressional  Committee,  is  interesting.  Mr. 
Carnegie  stated  that  he  accepted  $420,000,000  for  property 
having  a  book  value  of  $84,000,000,  which  created  an  impression 
in  the  minds  of  many,  believing  physical  plant  or  book  value 
expressed  the  worth  of  the  entire  concern,  that  Mr.  Carnegie  had 
accepted  a  ''nuisance"  value  for  his  undertaking.  But  such  was 
not  the  case,  as  Mr.  Carnegie  had  several  times  stated  that  he 
valued  his  partners  more  than  his  plant,  and  that  given  his 
organization  he  would  reproduce  his  plant  in  short  order.  That 
the  organization  was  worth  the  amount  paid  for  it,  has  been 
proven  by  subsequent  earnings. 

One  cause  for  the  prevalent  objection  to  any  appraisal  what- 
ever of  utility  properties  arises  on  the  part  of  those  who,  with  a 
knowledge  of  the  value  of  certain  property,  feel  that  unjust  and 
unfair  Court  or  Commission  decisions  have  been  made  which  were 
based  on  incomplete  but  so-called  appraisals.  But  this  is  equiv- 
alent to  blaming  a  court  for  rendering  a  decision  based  on  the 
evidence  introduced.  If  the  corporations  have  failed  to  furnish 
evidence  that  substantiates  anything  except  physical  values  or 
have  put  forward  claims  for  non-physical  values  without  ade- 
quate proof  thereof,  why  should  Courts  or  Commissions  be  criti--^ 
cised?  It  has  been  too  often  the  practice  to  employ  engineers  to 
ascertain  and  testify  as  to  physical  values,  leaving  it  to  corpora- 
tion officers,  dealing  in  "glittering  generalities,"  or  accountants 
with  records  of  original  costs  or  attorneys  in  their  briefs  to 
attempt  to  approve  non-phj^sical  values,  these  most  intricate  of 
all  values.  The  result  has  been  failure  to  secure  recognition  of 
and  allowance  for  intangible  values  with  consequent  wrong  done 
the  owners  through  the  errors  or  ignorance  which  can  be  charged 
only  to  officials  or  counsel.  On  the  other  hand,  there  exists  a 
tendency  on  the  part  of  the  public  and  its  representatives,  to 


INTRODUCTION  5 

forget,  whatever  may  be  accepted  to-day  as  the  correct  theory 
of  earnings  to  be  properly  allowed  public  utilities,  that,  with  rare 
exception,  it  was  the  practice  to  grant  franchises  without  ex- 
pressed limitation  as  to  the  amount  or  basis  of  fair  return,  but 
rather  to  encourage  investors  with  the  expectation  of  larger 
profits  than  might  be  expected  from  ordinary  commercial 
business.  Consequently,  to  undertake  to  now  cut  down  the 
earnings  from  public  utility  properties,  to  a  basis  comparable  to 
that  demanded  by  uninvested  capital,  as  the  return  on  the  most 
secure  investments,  is  as  absurd  and  unfair  to  the  original 
investors  as  to  limit  the  value  of  utility  property  merely  to 
physical  plant  values,  omitting  recognition  of  the  intangible 
elements. 

A  sane  and  dispassionate  view  of  what  should  be  considered  in 
ascertaining  the  fair  value  of  utility  property,  was  expressed  by 
the  Special  Master  in  the  Columbus  case  and  is   as  follows: 

"Fictitious  values  will  be  disregarded,  improvident  and  unwise  ex- 
penditures will  not  be  taken  into  account,  but  only  the  fair  value  of  the 
property  will  be  used  as  a  basis,  including,  however,  in  such  fair  value 
not  only  the  tangible  propert}'  devoted  to  the  public  service,  but  such 
intangible  value  as  may  be  legitimate  and  may  be  justly,  under  all 
circumstances,  credited  to  the  producer  on  the  one  hand,  and  debited  to 
the  consumer  on  the  other,  so  as  to  bring  about  the  just  compensation 
rightly  belonging  to  the  company,  and  legitimately  to  be  paid  for  by 
the  consumer. 

"Necessarily  the  ascertainment  of  such  value  is  in  all  cases  a  difficult 
matter,  and  its  final  adjustment  by  the  court  can  rarelj^,  if  at  all,  be 
made  with  mathematical  exactness.  All  the  court  can  do  is,  from  the 
evidence,  to  arrive  at  such  a  value  as  will,  all  things  considered,  be 
fairly  equally  just  to  both  parties."^ 

The  difficulty  of  ascertaining  the  value  sought,  is  increased  by 
reason  of: 

(a)  The  necessity  of  dealing  with  tangible  or  physical  values,  as 
well  as  intangible  and  wholly  estimated  values. 

(b)  The  lack  of  an  accepted  theory,  which  results  in  confusion 
and  non-uniformity,  under  new  and  sudden  demands  to  meet 
unforeseen  and  unexpectedly  developed  conditions. 

(c)  The  subject  involves  not  alone  the  broadest  engineering 

'  The  Columbus  Railway  and  Light  Company  vs.  the  City  of  Columl^us. 
Circuit  Court  of  the  United  States  Southern  District  c<"  Ohio,  Eastern 
Division. 


6  VALUATION  OF  PUBLIC  UTILITIES 

knowledge,  but  also  some  of  the  deepest  economic  questions,  in 
both  of  which  sciences  but  few  men  have  wide  experience. 

(d)  Engineers,  who  are  the  usual  appraisers,  due  to  the  rapid, 
marvelous  and  revolutionary  developments  within  recent  years, 
have  available  in  many  instances,  too  few  correlated  facts  and 
figures  on  which  to  base  their  conclusions. 

(e)  The  results  obtained  under  different  conditions  of  opera- 
tion are  so  varied,  the  experience  of  different  engineers  on  which 
conclusions  must  be  largely  based,  are  so  diversified,  and  finally, 
the  training,  personality  and  prejudices  of  many  experts  so 
largely  qualifies  their  opinions,  that  unanimous  conclusions  have 
been  impossible. 

Purpose. — The  usual  object  sought  in  undertaking  an  ap- 
praisal of  a  public  utility  property  is  to  determine  its  value  for 
purposes  of: 

(a)  Sale  or  Transfer. — Where  a  utility  property  is  to  be  sold 
to  a  municipality,  corporation  or  individual,  an  appraisal  prob- 
ably covering  the  entire  value  of  the  property,  certainly  that  of 
the  physical  plant,  more  or  less  exact,  will  be  required  by  the 
purchaser  before  closing  the  sale.  Such  procedure  would  be  in 
line  with  ordinary  commercial  business  sense  and  indicates  how 
essential  a  knowledge  of  the  worth  even  of  the  physical  property 
alone,  is  considered,  despite  the  cry  of  those  who  argue  that 
valuations  of  physical  property  indicate  nothing  as  to  real  or 
commercial  values.  Important  valuations  for  purpose  of  sale 
passed  on  by  the  Supreme  Court  are,  for  example,  the  Kansas 
City  Water  Works  case  and  the  Omaha  Water  Works  case. 

(b)  Fixing  Rates. — Rate  regulation  of  utilities  has  become  to 
be  accepted  as  an  unquestioned  principal  of  present  day  civiliza- 
tion. Any  public  utility  is  therefore  likely  to  have  its  rates 
questioned,  passed  upon  and  fixed  by  authorized  public  bodies. 
Preliminary  to  and  necessary  for  an  intelligent  determination  of 
a  proper  and  fair  rate  information  must  be  had,  as  to  income  and 
the  fair  value  of  the  property  rendering  the  service  for  which  the 
rate  in  question  is  being  fixed.  These  principals  have  been  so 
frequently  enunciated  and  established  by  rulings  of  various 
courts,  including  the  Supreme  Court,  that  no  argument  as  to 
their  validity  is  worthy  of  serious  consideration.  The  extensive 
valuations  of  railroad  property  in  the  States  of  Minnesota  and 
Washington,  as  well  as  much  of  the  valuation  work  of  the  present 
Wisconsin  Commission  has  been  undertaken  to  determine  proper 


INTRODUCTION  7 

rates,  and  it  is  primarily  for  this  purpose  that  valuation  of  all  the 
railway  properties  in  the  countr}',  by  the  Interstate  Commerce 
Commission,  is  being  urged. 

(c)  Capitalization. — In  the  past,  both  private  corporations  and 
public  service  companies  have  been  permitted  to  issue  and  use, 
practically,  any  unlimited  amount  of  securities  which  those 
interested  in  the  organization,  for  any  reason,  thought  desirable. 
The  result  has  been  an  unfair  inflation  and  undue  "watering"  of 
securities  with  consequent  loss  to  investors  and  discredit  to  the 
properties  so  handled.  With  the  recognition  of  the  right  on  the 
part  of  the  public  to  limit  net  earnings  to  a  fair  return  on  the 
value  of  the  property  used,  there  has  resulted  a  strong  feeling  that 
capitalization  should  indicate  the  value  of  any  given  property  so 
that  the  fair  return  on  the  property  might  bear  proper  relation 
to  the  return  on  capitalization.  In  consequence,  Public  Service 
Commissions  and  other  bodies  authorized  to  pass  on  and  approve 
the  amount  of  stock  and  bonds  to  be  used  by  Public  Service 
Corporations  under  their  control,  have  quite  generally  insisted 
upon  an  appraisal  of  the  property  in  order  to  intelligently 
determine  the  proper  amount  of  capitalization. 

Where  securities  are  sought  to  be  issued,  in  addition  to  amounts 
already  outstanding,  to  cover  property  already  in  existence, 
appraisals  are  usually  demanded.  Where  such  additional  securi- 
ties are  being  used  to  provide  funds  for  new  property,  the  dis- 
counts at  which  the  securities  are  to  be  sold  and  the  disposition 
of  the  proceeds  therefrom  are  comparatively  easily  regulated  and 
are  quite  generally  prescribed  by  public  authorities  having  con- 
trol of  such  matters.  W^hile  it  is  the  general  opinion  and  usual 
requirement  of  public  authorities  that  the  issuance  of  additional 
securities  is  only  warranted  when  additions  to  property,  not  the 
replacement  or  renewal  of  existing  property,  are  to  be  made, 
nevertheless  where  income  is  not  sufficient  to  provide  for  renewals 
and  replacements,  the  cost  of  same  through  the  sale  of  additional 
securities,  has,  under  occasional  and  mitigating  circumstances, 
been  authorized  and  approved  by  Public  Service  Commissions 
and  supported  by  opinions  of  the- courts.^  Allied  conditions  may 
warrant  the  recognition  of  capitalization  covering  property  no 
longer  in  existence,  even  at  the  time  of  issuance,  provided  the 

'  Application  of  the  Binghamton  Light,  Heat  and  Power  Co.  Case  No.  74. 
PubHc  Service  Commission  of  New^York,  Second  District,  Vol.  I,  1910, 
p.  831. 


8  VALUATION  OF  PUBLIC  UTILITIES 

property,  installed  in  good  faith,  has  been  abandoned  through 
changes  in  the  art,  inadequacy  to  comply  with  local  requirements 
or  similar  conditions,  so  rapidly  and  in  such  large  amounts  as  to 
preclude  the  writing  off  of  such  investment  without  jeopardizing 
the  finances  of  the  corporation  or  doing  injustice  to  the  investors.^ 
The  appraisal  of  the  railroads  in  the  State  of  Texas,  as  well 
as  many  of  those  made  by  the  Public  Service  Commissions  of 
the  several  States,  have  been  made  for  purposes  of  regulation  of 
capitalization. 

(d)  Taxation. — The  value  of  property  for  purposes  of  taxation 
may  be  appraised  on  the  basis  of: 

(a)   Real  estate. 

(h)    Going  concern. 

(c)    Franchise  value. 

If  the  appraisal  is  made  simply  to  determine  the  value  of  the 
real  estate  and  personal  property  for  purposes  of  taxation,  the 
same  as  other  city  property,  after  proper  ascertainment  of  full 
value,  the  local  rate  of  equalization — that  is  the  ratio  of  average 
value  on  which  taxes  are  based  compared  to  the  value  which 
property  would  bring  under  favorable  conditions  of  sale — should 
be  applied  to  the  full  value  so  that  corporation  property  will  be 
taxed  on  the  same  relative  basis  as  other  property. 

Appraisal  for  going  concern  value  of  a  corporation  may  be 
made  to  ascertain  the  proper  basis  for  taxation  based  on  the 
value  as  an  operating  entity.  Sometimes  this  form  of  tax 
is  based  on  gross  or  net  income.  Sometimes  on  the  output  of  a 
generating  station  or  the  car-miles  run. 

Appraisal  for  the  purposes  of  determining  the  proper  amount 
of  franchise  tax  might  apply  simply  to  the  value  of  the  property 
in  the  public  streets,  as  is  the  case,  for  example,  in  New  York 
State  in  determining  the  special  franchise  tax. 

There  may  be  other  considerations  depending  on  local  con- 
ditions which  would  require  still  other  division  of  corporation 
property  but  the  instances  cited  indicate  the  necessity  of  having 
carefully  in  mind  the  purpose  for  which  the  appraisal  is  to  be 
made  and  classifying  and  valuing  the  property  accordingly. 
The  Wisconsin  and  Michigan  State  appraisals  of  the  steam  roads 
were  for  purposes  of  taxation. 

(e)  Accounting. — ^W^here  uniform  systems  of  accounting  are 

»The  Milwaukee  Railway  and  Electric  Light  Co.  vs.  City  Milwaukee. 
87  Fed.  577 


INTRODUCTION  9 

introduced  as  is  frequently  the  case  where  Public  Service  Com- 
missions are  first  created,  it  may  be  desirable  or  necessary  to 
appraise  property  for  the  purpose  of  furnishing  a  basis  for  opening 
accounts  or  revising  methods  of  bookkeeping. 

Basis. — ^It  has  been  quite  generally  stated  by  the  courts  that 
no  single  basis  of  valuation  is  to  be  used  alone  for  determining 
the  fair  value  of  public  utility  property.  The  general  rule  is 
well  set  forth  by  the  Supreme  Court  of  the  United  States  where 
it  says: 

"The  basis  of  all  calculations  as  to  the  reasonableness  of  rates  to  be_ 
charged  by  a  corporation  maintaining  a  public  highway  under  legislative 
sanction  must  be  the  fair  value  of  the  property  being  used  by  it  for  the 
convenience  of  the  public."^ 

In  order  to  determine  that  value,  the  Court  says: 

"The  original  cost  of  construction,  the  amount  expended  in  perma- 
nent improvements,  the  amount  and  market  value  of  its  bonds  and 
stock,  the  present  as  compared  with  the  original  cost  of  construction,  the 
probable  earning  capacity  of  the  property  under  the  particular  rates 
prescribed  by  statute  and  the  sum  required  to  meet  operating  expenses, 
are  all  matters  for  consideration  and  are  to  be  given  such  weight  as  may 
be  just  and  right  in  each  case."^ 

It  is  probably  impossible  to  absolutely  and  exactly  fix  in 
dollars  and  cents,  the  value  of  the  various  elements  going  to 
make  up  a  utility  property.  This  is  clearly  illustrated  in  deci- 
sions of  commissions,  as  for  example  the  Wisconsin  Commission 
says  in  one  well-known  case: 

"From  what  has  thus  been  said  it  appears  to  us  that  for  the  purposes 
of  this  case  it  is  eiiuitable  to  all  concerned  to  allow  the  respondent  rea- 
sonable returns  in  the  way  of  interest  and  profits  on  a  valuation  of  about 
S412,000  for  the  gas  plant  and  of  about  $535,000  for  the  electric  plant. 
The  rates  of  returns  that  should  thus  be  allowed  will  be  explained  later. "^ 

Again  the  Public  Service  Commission  of  New  York,  First 
District,  disapproving  the  plan  of  re-organization  of  the  Third 
Avenue  R.  R.  Co.  says: 

"The  amount  for  development  charges  will  be  about  $3,500,000."^ 

'  Smyth  vs.  Ames,  169  U.  S.  466. 

2  Smyth  vs.  Ames,  169  U.  S.  466. 

'  State  Journal  Printing  Co.  vs.  Madison  Gas  &  Elec.  Co.  Decision  dated 
March  8,  1910. 

*  Case  No.  1181.     Decision  dated  July  29,  1910. 


10  VALUATION  OF  PUBLIC  UTILITIES 

The  basis  on  which  a  valuation  is  to  be  made  and  the  way  it  is 
to  be  used,  must  be  carefully  considered  and  kept  in  mind  when 
making  an  appraisal.  It  is  possible  that  a  given  valuation,  when 
completed,  may  be  used  equally  well  for  several  purposes,  but  not 
necessarily  so.  From  every  standpoint,  the  cost  of  reproduction, 
or  the  original  cost  or  the  scrap  value  of  a  given  piece  of  physical 
property  at  a  given  time  or  place,  may  be  accurately  determined. 
That  is  mainly  an  engineering  question  but  the  "fair  value"  of 
utility  property  will  vary  for  the  particular  time  and  case  under 
consideration.  The  determination  of  the  fair  value  of  a  given 
property  to  be  used  as  a  basis  for  fixing  proper  returns  or  rates 
to  be  charged,  depends  upon  the  value  of  the  property  being  lised 
in  the  service  from  which  the  returns  or  rates  are  earned  and  is 
ofttimes  quite  different  from  the  fair  value  of  the  total  property 
of  any  utility,  part  of  which  may  be  held  for  future  extensions  or 
profit  or  use  for  extraneous  purposes,  but  all  of  which  would 
have  to  be  considered  and  allowed  in  case  of  capitalization  or 
purchase  or  sale,  as  a  whole. 

Ex-Commissioner  of  the  Public  Service  Commission  of  New 
York,  First  District,  Mr.  Ed.  M.  Bassett,  says: 

"If  it  is  decided  that  a  public  utility  should  be  taxed  on  its  total  value 
as  a  going  concern — that  is,  its  commercial,  market  or  sale  value — then 
franchise  and  going  value  will  be  included.  If,  on  the  other  hand,  the 
public-utility  plant  is  to  be  taxed  precisely  as  other  real  estate,  the  cost 
of  reproduction  less  depreciation  will  be  the  basis.  There  is  no  inherent 
inconsistency  in  using  one  method  of  valuation  for  tax  purposes  and 
another  method  for  rate  purposes.  The  tax,  by  whatever  method 
assessed,  is  considered  an  operating  expense  in  fixing  rates,  and  is 
therefore  borne  by  the  user  of  the  service  wherever  rates  of  charge  are 
strictly  regulated.  Methods  of  ad  valorem  taxation  must  be  worked 
out  with  an  eye  single  to  what  is  just  and  practicable  in  taxation,  and 
methods  of  valuation  for  rate  purposes  must  be  worked  out  with  an  eye 
single  to  what  is  just  and  constitutional  in  rate  making."' 

"Different  methods  of  estimating  the  value  of  property  may  properly 
be  employed  when  it  is  valued  for  different  purposes.  When  a  valuation 
is  placed  on  property  which  has  become  affected  by  a  public  use,  for  the 
purpose  of  ascertaining  whether  the  maximum  rate  of  compensation 
fixed  by  law  for  its  use  is  reasonable  or  otherwise,  it  is  obvious  that  the 
income  derived  therefrom  by  the  owner  before  it  was  subjected  to  legis- 
lative control  cannot  always  be  accepted  as  a  proper  test  of  value  because 

1  National  Association  of  Railway  Commissioners,  Washington,  D.  C, 
Oct.  10-13,  1911. 


INTRODUCTION  11 

the  compensation  which  the  owner  charged  for  its  use  ma)-  have  been 
excessive  and  unreasonable.  Again,  when  property  has  been  capitalized 
by  issuing  stock,  neither  the  market  value  nor  the  par  value  of  the  stock 
can  be  accepted  in  all  cases  as  a  proper  criterion  of  value,  because  the 
stock  may  not  represent  the  money  actually  invested,  and  furthermore 
because  the  property  may  have  been  capitalized  mainly  with  reference 
to  its  income  producing  capacity,  on  the  assumption  that  it  is  ordinary 
private  property  which  the  owner  may  use  as  he  thinks  proper  without 
being  subject  to  legislative  control.  On  the  other  hand,  however,  w^hen 
property  is  valued  for  the  purpose  last  stated,  it  is  clear  that  the  owner 
thereof  is  entitled  to  the  benefit  of  any  appreciation  in  value  above  the 
original  cost  and  the  cost  of  improvements,  which  is  due  to  what  may 
be  termed  natural  causes.  If  improvements  made  in  the  vicinity  of  the 
property,  the  growth  of  city  or  town  where  it  is  located,  the  building  of 
railroads,  the  development  of  the  surrounding  country  and  other  like 
causes,  give  property  an  increased  value,  the  owner  cannot  be  deprived 
of  such  income  by  legislative  action  which  prevents  him  from  realizing 
an  income  commensurate  with  the  enhanced  value  of  his  property.'" 

To  illustrate  the  preceding,  all  will  agree  that  valuation  for 
tax  purposes  must  be  conservative.  The  price  an  article  would 
bring  at  forced  sale  or  during  times  of  financial  stringency,  per- 
haps 70  to  85  per  cent,  of  reproduction  cost,  would  be  quite 
generally  accepted  in  American  cities,  as  a  fair  basis  of  value  for 
purposes  of  taxation.  If  value  as  security  for  a  loan  were  being 
sought,  an  appraisal  would  determine  the  price  that  could  be 
obtained  aside  from  consideration  of  the  particular  circumstances 
under  which  the  plant  was  installed.  The  security  value  would 
possibly  not  exceed  40  to  50  per  cent,  of  reproduction  cost,  because 
the  most  "fluid"  securities,  namely,  stocks  listed  on  the  exchange, 
are  not  accepted  as  collateral,  at  a  figure  exceeding  75  to  80  per 
cent,  of  quoted  prices.  On  the  other  hand,  an  investor  furnishing 
the  cash  and  taking  stock  and  bonds  in  return,  will  usually  and 
very  properly  insist  that  the  value  of  the  property  is  the  par 
value  of  the  securities  conservatively  issued,  although  sold  at 
some  discount.  Thus  it  will  be  seen  that  there  may  be  and 
easily  is  a  fair  and  honest  distinction  between  what  may  be 
determined  as  the  fair  value  of  property  for  capitalization,  safe 
taxation  or  rate  fixing  purposes.  And  yet  for  each  value  quali- 
fied as  to  its  exact  meaning,  there  should  be  but  one  figure  which 
is  the  result  of  a  fair,  competent  and  unbiased  conclusion  based 

'  Getting  vs.  Kansas  City  Stock  Yards,  82  Fed.,  839. 


12  VALUATION  OF  PUBLIC  UTILITIES 

upon  all  the  facts  in  the  case.  Of  course,  absolute  accuracy  in 
appraisal  work  is  out  of  question.  All  human  beings  are  liable 
to  make  errors  and  the  engineer  is  not  an  exception.  As  far  as 
possible,  the  personality  of  the  men  employed  in  valuation  work 
must  give  way  to  automatic,  self-regulating,  uniform  methods 
that  eliminate  the  personal  element,  and  focus  on  attaining  the 
single  figure  which  alone  is  correct. 

As  the  value  of  a  large  proportion  of  all  utility  corporation 
property  is  the  result  of  engineering  skill  and  effort,  engineers 
have  naturally  been  called  upon  to  estimate  and  determine  the 
values  in  question.  The  ascertainment  of  the  value  of  the  in- 
tangible property,  as  well  as  plant  value  is  essentially  an  engineer- 
ing problem,  because  engineers  of  proper  experience  and  qualifica- 
tion are  best  informed,  not  only  as  to  construction  cost,  but  also 
as  to  the  expenses  involved  in  getting  a  property  started,  and 
building  up  an  income  producing  business.  This  larger  field  of 
valuation  work,  however,  has  put  new  responsibilities  upon  the 
engineering  profession,  demanding  something  more,  in  the  way 
of  knowledge  of  values,  and  questions  of  law  and  economics,  than 
mere  construction  has  ever  before  required. 

So-called  appraisals  have  been  and  are  being  made  which,  while 
perhaps  adecjuate  for  the  purpose  intended,  are  little  more  than 
approximate  estimates,  completed  within  limited  time,  lacking 
in  detail  and  thoroughness  of  preparation  and  yet  are  being  used 
as  an  exact  basis  of  property  valuation.  Such  estimates  should 
be  clearly  indentified  as  to  their  completeness  and  accuracy, 
both  in  justice  to  their  makers  and  the  owners  of  the  property. 
Harm  has  been  done  by  the  misuse  of  such  so-called  valuations. 

An  appraisal  to  be  reliable  and  capable  of  standing  the  test  of 
cross-examination  and  appeal  to  the  courts  must  be  prepared 
with  elaborate  detail,  care  and  exactness.  The  importance  of 
making  a  full  and  careful  inventory  with  a  thorough  investigation 
as  to  local  costs  of  labor  and  prices  for  material  is  not  usually 
appreciated  by  those  newly  interested  in  appraisal  work.  Too 
great  emphasis  cannot  be  laid  upon  this  preliminary  work  neces- 
sary in  making  any  trustworthy  valuation. 


CHAPTER  II 
GLOSSARY 

Application  of  Terms. — The  recent  and  rapid  growth  of  valua- 
tion and  appraisal  work  has  caused  the  development  of  new 
terms  or  the  modification  of  old  ones.  Confusion  of  ideas, 
difference  of  opinion,  lack  of  experience,  new  and  sudden  de- 
mands have  resulted  in  non-uniformity  and  even  contradictory 
use  of  certain  words  by  the  engineering  and  accounting  profes- 
sion so  that  some  definition,  of  terms  as  used  by  the  author,  is 
necessary. 

One  of  the  Committees  of  the  National  Electric  Light  Associa- 
tion some  time  ago  undertook  to  correlate  definitions  of  the 
terms  used  in  connection  with  the  subject  of  depreciation,  which 
of  course  will  include  many,  if  not  most,  of  the  terms  used  in  the 
broader  subject  of  valuation.  It  has  been  suggested  that 
some  of  the  other  National  organizations,  for  example  the 
American  Institute  of  Electrical  Engineers,  undertake  the  classi- 
fication and  proper  definition  of  terms  used  by  the  engineering 
profession  in  appraisal  work,  but  thus  far  nothing  has  been  done 
by  that  organization. 

As  the  result  of  a  suggestion  in  a  paper  on  ''  Depreciation  as 
Related  to  Electrical  Properties,"  read  before  the  American 
Institute  of  Electrical  Engineers  in  1911  in  which  certain  applica- 
tion of  terms  was  proposed,  there  resulted,  in  the  discussion 
following  said  paper  and  in  the  Technical  Press  thereafter,  con- 
siderable expression  of  opinion  as  to  the  proper  meaning  of 
terms  used  in  connection  with  appraisals  and  the  subject  of 
depreciation,  but  the  chief  result  was  the  disclosure  of  a  wide 
diversity  of  opinion  and  considerable  variation  in  the  use  to  be 
made  of  many  expressions  commonly  employed  in  connection 
with  this  class  of  work. 

The  author  begs  to  offer  the  following  explanation  and  defini- 
tion of  terms  as  that  expressing  the  more  usual  meaning  applied, 
by  engineers  of  standing,  to  their  use  of  the  terms  indicated. 

Value. — Academically  the  word  "value"  relates  to  "barter 
and    exchange"    exclusively.     Writers    on   Political    Economy, 

13 


14  VALUATIO}^  OF  PUBLIC  UTILITIES 

such  as  John  Stewart  Mill,  have  economically  defined  "value" 
as  a  ratio  between  demand  and  supply  at  a  given  time  or  place 
for  a  commodity  or  service,  or  a  ratio  between  the  demand  and 
supply  at  a  given  time  and  place  of  another  commodity  or  service. 
But  one  of  the  principal  causes  of  demand — there  are  several — 
is  usefulness  or  utility,  consequently ' '  value  "  may  properly  be  used 
to  measure  utility.  Even  the  utility  of  such  an  "unexchangeable 
and  unbarterable"  article  as  the  human  hand,  when  severed  from 
the  body,  is  measured  in  dollars  by  the  jury  making  an  award.  In 
valuation  work,  as  a  rule,  loss  of  utility  results  in  loss  of  value, 
maximum  utility  determines  maximum  value.  The  ratio  .of 
existing  to  possible  utility,  measures  by  the  same  ratio  applied 
to  cost,  existing  value,  in  dollars,  of  the  commodity  or  service. 

Aside  from  any  attempted  definitions  which  may  be  purely 
academic  or  put  forth  as  a  species  of  mental  gymnastics,  engi- 
neers engaged  in  valuations  and  appraisals  agree  that  utility 
has  a  value  which  may  be  expressed  in  dollars  and  this  is  the 
value;  not  a  sales  value,  i.e.,  the  price  which  an  individual 
article  would  bring  if  offered  for  sale;  which  is  to  be  determined 
in  making  an  appraisal.  If  the  term  related  exclusively  to 
barter  and  sale,  only  second-hand  or  scrap  values  would  be 
considered,  which  is  not  the  basis  on  which  any  appraisal  has 
been  or  is  being  made  for  determining  fair  values  of  the  "used 
and  useful"  property  belonging  to  an  operating  organization. 

Physical  Value. — As  the  term  indicates,  physical  value  relates 
to  material  things  or  substances,  the  property  which  can  be 
"seen  and  felt."  It  includes,  primarily,  "those  things  which 
are  visible  and  tangible,  capable  of  being  inventoried,"  but 
secondarily,  certain  non-physical  charges  "  which  are  an  insepar- 
able part  of  the  cost  of  construction  but  which  do  not  appear 
in  the  inventory  of  the  completed  property." 

These  secondary  values  which  are  usually  included  as  a  part 
of  the  physical  property  are  expenditures  for  such  items  as: 

1.  Engineers'  and  architects'  fees,  including  cost  of  design 
and  testing  all  construction  and  equipment,  etc. 

2.  Administration  expenses  chargeable  to  construction,  in- 
cluding superintendence,  inspection,  accounting,  salaries  of 
officers  and  clerks,  consents  of  authorities  and  property  owners 
for  temporary  work  or  use,  legal  expenses,  rent,  printing,  store- 
room expenses,  etc. 

3.  Provision   for   various   incidentals   and   contingencies,   in- 


GLOSSARY  15 

complete  inventories,  unforeseen  requirements,  etc.,  which 
practical  experience  has  shown  to  be  necessary. 

It  may  be  questioned  whether  the  expenditure  for  such  in- 
tangible items  as  eAgineering  and  architects'  fees,  administration 
and  local  expenses  and  charges  of  such  character  should  logic- 
ally be  included  as  a  part  of  the  physical  property  or  more  prop- 
erly classified  with  what  are  hereafter  known  as  "  Development 
Expenses."  But  it  is  becoming  the  general  practice  to  consider 
these  expenditures  which  are  usually  a  fairly  uniform  and  defi- 
nite percentage  of  the  cost  of  the  machinery,  buildings,  and 
other  equipment  should  very  properly  be  included  and  made  a 
part  of  the  so-called  physical  values  leaving  the  other  intangible 
costs  which  vary  widely  with  the  different  properties  under  con- 
sideration, depending  on  local  conditions,  magnitude,  method 
of  financing,  etc.,  for  a  separate  classification  called  development 
items  or  expenses. 

It  must  be  clearly  understood  that  these  intangible  expenses, 
whether  classified  as  a  part  of  the  physical  cost  or  separated 
under  the  head  of  Development  Expenses,  are  all  necessarily 
and  indisputably  a  part  of  the  total  cost  of  the  completed 
physical  property. 

Scrap  Value. — All  physical  property  has  a  certain  scrap  or 
junk  value,  a  "barter  and  sale"  minimum  basis  beyond  which 
there  is  no  depreciation,  hence  physical  property  can  only  de- 
teriorate until  it  reaches  its  scrap  value.  This  value  is  simply 
the  fair  market  price  that  a  purchaser  will  pay  for  the  property 
in  its  disintegrated  condition.  If  a  property  consisting  of  its 
several  elements  is  usable  not  as  junk  but  as  serviceable  property 
elsewhere,  a  higher  price  than  scrap  value  is  obtainable,  and  this 
worth  has  been  characterized  as  "salvage  value"  or  "minimum 
going  value."  If  the  cost  of  removal  and  transportation  to  its 
market  exceeds  the  normal  junk  price  of  an  article,  then  the 
scrap  or  junk  value  becomes  negative  and  the  article  is  valueless. 

Wearing  Value. — If  from  the  cost — taken  on  whatever  basis  is 
determined  to  be  the  correct  one — there  is  subtracted  "  scrap' ' 
or  "salvage"  value  of  given  physical  property,  the  remainder 
lis  a  value  known  as  "wearing  value,"  which  will  deteriorate 
more  or  less  rapidly  and  entirely  pass  away,  as  regards  the  in- 
stallation being  considered,  at  the  expired  life  of  said  property, 
I  which  life  ceases  through  physical  decay,  inadequacy,  obsoles- 
cence or  sudden  damage. 


16  VALUATION  OF  PUBLIC  UTILITIES 

Service  Value. — Physical  property,  honestly  and  intelligently 
purchased  with  a  view  to  its  suitableness  for  the  service  intended, 
aside  from  some  hidden  defect  or  untoward  accident,  generally 
maintains  its  original  utility  and  hence  its  value,  for  the  purpose 
of  use,  practically  throughout  its  life,  except  for  such  deterioration 
as  results  from  wear  and  tear  or  deferred  maintenance.  The  life 
of  the  property  may  expire  normally  through  age  or  prematurely 
through  inadequacy  or  obsolescence  but  these  two  latter  classes 
of  depreciation  develop  quickly  so  that  for  the  larger  part  of  the 
time  used,  the  service  value  of  property  will  approximate  the 
cost.  Service  value  must  not  be  confounded  with  going  value. 
Service  value  results  from  the  use  of  the  property  in  the  place  and 
for  the  purpose  for  which  it  was  intended.  Going  value  may  or 
may  not  accrue  in  addition  to,  and,  over-and-above  service 
value.  Going  value  relates  to  establishment  of  earnings  while 
service  value  exists  regardless  of  earnings. 

Present  Value. — This  expression  refers  to  the  estimated  value 
of  the  physical  property  as  it  exists  at  the  period  being  considered. 
It  may  have  one  of  several  values,  some  purely  academic  and 
artificial  as  explained  more  fully  hereafter,  depending  on  what 
application  is  made  of  the  theory  of  depreciation  and,  therefore, 
present  value  always  needs  some  qualification  or  explanation 
as  to  the  sense  in  which  the  term  is  used.  The  more  frequent 
application  of  the  term  is  to  that  value  obtained  by  deduct- 
ing, from  "original  cost"  or  "cost  to  reproduce  new,"  the 
total  depreciation,  which  may  be  either  absolute  depreciation 
or,  as  used  by  some  authorities,  the  sum  of  both  absolute, 
or  accrued  and  theoretical  or  estimated  depreciation.  Though 
usually  so,  "present  value"  does  not  necessarily  include  a 
deduction  from  cost  to  cover  deterioration  as  is  illustrated  in 
the  valuation  of  the  Texas  Railroads  made  by  the  Commission 
of  that  State,  where  no  deduction  from  cost  of  reproduction  was 
made  on  account  of  existing  wear  and  tear  or  normal  deterioration. 

Appreciation  as  well  as  depreciation  must  be  considered  in  de- 
termining "present  value"  as  indicated  by  the  Supreme  Court. 

"And  we  concur  with  the  court  below  in  holding  that  the  value  of  the 
property  is  to  be  determined  as  of  the  time  when  the  inquiry  is  made 
regarding  the  rates.  If  the  property,  which  legally  enters  into  the 
consideration  of  the  question  of  rates,  has  increased  in  value  since  it  was 
acquired,  the  comi^any  is  entitled  to  the  benefit  of  such  increase."* 

'  Wilcox  vs.  Consolidated  Gas  Company,  212  U.  S.  52. 


GLOSSARY  17 

"Original  cost"  or  "cost  of  reproduction  new,"  in  connection 
with  depreciation  of  the  phj'sical  property  inventoried  is  quite 
generally  used  in  determining  present  value,  but  in  this  connec- 
tion it  is  interesting  to  note  the  unique  opinion  of  the  Iowa 
Supreme  Court,  which  in  view  of  the  numerous  decisions  of 
other  courts  can  hardly  be  considered  a  safe  precedent  to  follow : 

"The  contention  illustrated  how  inequitable  would  be  a  rule  arbi- 
trarily fixing  the  value  as  that  for  which  a  system  might  be  replaced. 
Aside  from  this  being  impractical  it  may  safely  be  said  that  there  is 
hardly  an  enterprise  of  this  character  which,  were  it  destroyed,  would  be 
restored  as  it  was  before.  In  ascertaining  values  in  this  way,  the  worth 
of  a  new  plant  of  equal  capacity,  efficiency  and  durability,  with  proper 
discounts  for  defects  in  the  old  and  depreciation  for  use,  should  be  the 
measure  of  value  rather  than  the  cost  of  exact  duplication."* 

In  estimating  "present  value"  it  is  perhaps  unnecessary  to 
state  that  "barter  and  sale,"  "the  price  it  will  fetch,"  "second 
hand,"  "scrap"  or  "forced  sale"  values  are  not  the  "fair  values" 
to  be  considered  in  connection  with  a  "going  concern."  This 
has  been  repeatedly  affirmed  b}^  the  courts,  as  indicated,  for 
example,  by  the  following  decision  from  the  Supreme  Court  of 
Maine. 

"Now  what  is  the  property  which  the  district  has  taken  by  power  of 
eminent  domain?  In  the  first  place  it  is  a  structure,  pure  and  simple, 
consisting  of  pipes,  pumps,  engines,  land  rights,  and  water  rights.  As  a 
structure,  it  has  value  independent  of  any  use,  or  right  to  use,  where  it  is, 
a  value  probably  much  less  than  it  cost,  unless  it  can  be  used  where  it  is, 
that  is,  there  is  a  right  to  use  it.  Nevertheless,  it  has  value  as  a  struc- 
ture. But,  more  than  this,  it  is  a  structure  in  actual  use,  a  use  remuner- 
ative to  some  extent.  It  has  customers,  it  is  actually  engaged  in 
business,  it  is  a  going  concern.  The  value  of  the  structure  is  enhanced 
by  the  fact  that  it  is  used  in,  and  in  fact  is  essential  to,  a  going  concern 
business.  We  speak  sometimes  of  a  going  concern  value  as  it  is,  or 
could  be,  separate  and  distinct  from  structure  value — so  much  for 
structure  and  so  much  for  going  concern.  But  this  is  not  an  accurate 
statement.  The  going  concern  part  of  it  has  no  existence  except  as  a 
characteristic  of  the  structure.  If  no  structure,  no  going  concern.  If 
a  structure  in  use,  it  is  a  structure  whose  value  is  affected  bj^  the  fact 
that  it  is  in  use.  There  is  only  one  value.  It  is  the  value  of  the  struc- 
ture as  being  used.     That  is  all  there  is  of  it."^ 

*  Cedar  Rapids  Gas  Lt.  Co.  vs.  City  of  Cedar  Rapids,  120  N.  W. 
2  Brunswick    and   Topsham    Water   District   vs.   Maine   Water  Co..    99 
Maine,  371. 
2 


18  VALUATION  OF  PUBLIC  UTILITIES 

In  obtaining  the  depreciated  or  present  value  of  "used  or 
useful"  property,  worn  out  or  replaced  but  still  inventoried 
material,  whiph  has  no  value  except  for  sale,  may  be  put  in  at 
scrap  or  salvage  value,  unless  such  property  is  being  carried 
merely  to  artificially  increase  values. 

Original  cost  is  usually  taken  to  mean  the  actual  expenditures 
made  for  physical  property,  including  original  construction  and 
usually  all  additions  since  that  time.  The  term  is  taken  to 
include  those  items  which  are  classed  as  "Development  Ex- 
penses" and  occasionally  even  the  value  of  franchises,  good 
will  or  going  value.  Original  cost  should  be  shown  in  the  books 
of  the  corporations  but  it  is  not  always  there  obtainable.  Often 
because  of  casualty  by  fire  or  flood  or  frequent  mergers,  con- 
solidations and  reorganizations,  old  records  have  been  lost  and 
sometimes  they  have  purposely  been  destroyed  in  order  to 
obliterate  the  original  cost  of  the  property.  Of  course,  original 
cost  may  or  may  not  bear  any  relation  to  the  present  worth  of 
the  property  being  considered.  The  value  of  real  estate  for 
example  may  have  appreciated  largely  so  that  its  original  cost 
bears  no  relation  to  its  present  value;  on  the  other  hand  machin- 
ery and  equipment  may  have  been  worn  out  and  replaced  by 
additions  without  writing  off  the  value  of  the  original  property, 
no  longer  in  existence.  Proper  bookkeeping  methods  would  of 
course  provide  for  the  increase  or  reduction  of  the  capital  ac- 
count as  property  is  added  or  abandoned  and  discarded,  unless 
possibly  the  earnings  have  been  so  small  as  to  preclude,  without 
unfairness  to  the  stockholders  or  bankruptcy  to  the  corporation, 
the  inclusion,  as  a  part  of  operating  expense,  of  the  value  of 
property  added  to  replace  that  already  a  part  of  the  capital 
account. 

Cost  to  Replace  New,  Replacement  Cost  or  Cost  of  Reproduc- 
tion.— These  terms,  so  much  in  evidence  nowadays  and  recognized 
b)''  the  courts,  refer  to  an  assumed  value  based  on  the  estimated 
cost  of  reproducing  the  property  new  on  the  basis  of  prices 
current  at  the  time  of  estimate — prices  that  fluctuate  consider- 
ably are  averaged  for  five  years  preceding  the  date  of  the  ap- 
praisal— and  is  made  up  to  include  everything  that  can  be 
inventoried  regardless  of  original  cost,  age,  service  value  or 
present  condition  as  effected  by  depreciation.  Novices  in 
appraisal  work  frequently  fail  to  appreciate  that  the  terms  here 
being  considered  refer  exclusively  to  the  cost  of  replacing  exist- 


GLOSSARY  19 

ing  (with  due  consideration  for  inadequacy  and  obsolescence) 
physical  property  by  new  property  of  a  type  in  all  respects 
identical  with  the  old.  The  terms  do  not  refer  to  the  sub- 
stitution of  a  different  type  capable  of  rendering  equivalent 
service  or  of  equal  utility,  that  would  call  for  new  design,  ini- 
proved.  apparatus,  concerning  which  engineers  would  differ 
widely. 

Of  course,  a  defect  in  the  reproduction  cost  theory  is  that  a 
utility  cannot  buy  its  materials,  labor,  propei'ty  at  average 
figures  but  must  make  its  expenditures  when  times,  and  con- 
ditions or  ordinances  may  require,  often  during  periods  of  pros- 
perity which  consequently  means  during  periods  of  inflated 
prices. 

Development  Expenses. — In  connection  with  the  establishment 
of  any  utility  property  as  an  operating  entity,  there  are  certain 
expenditures  necessary  for  developing  and  completing  the  phy- 
sical structures  aside  from  the  expenses  of  developing  the  business 
and  producing  an  income.  The  former  may  be  classed  as  "De- 
velopment Expenses"  and  the  latter  as  "Going  Value,"  but 
both  items  are  apart  from  and  in  addition  to  those  expenditures 
relating  to  the  cost  of  the  physical  plant.  As  a  class,  these 
expenses  are  sometimes  referred  to  as  "over-head  charges," 
more  frequently  as  "intangible  expenses,"  but  as  they  refer 
largely  to  the  outlay  necessary  in  getting  the  physical  plant 
running,  the  author  prefers  the  quite  commonly  used  term 
"Development  Expenses"  which  generally  cover  most  or  all  of 
the  following  expenditures. 

1.  Legal  and  other  expenses  of  preliminary  promotion,  in- 
corporation and  organization,  procuring  consents  of  property 
owners,  condemnation  proceedings,  obtaining  franchises,  con- 
sents and  certificates  from  Public  Service  Corporations  and 
other  public  bodies,  sometimes  title  examinations  and  insurance. 

2.  Technical  expenses  in  connection  with  preliminary  work, 
surveys,  expert  estimates,  etc. 

3.  Interest  on  capital  and  bond  issues,  wages  of  superintend- 
ence and  administration  not  chargeable  to  construction  ordi- 
narily necessary  in  connection  with  putting  a  property  in  going 
order;  and  also  sometimes  the  deficiency  in  operating  expenses 
and  taxes  until  the  property  is  put  on  a  paying  basis. 

4.  Taxes  of  various  amounts  including  corporation  tax, 
mortgage  tax,  real  estate  tax,  personal  property  tax,  capital  and 


20  VALUATION  OF  PUBLIC  UTILITIES 

State  tax,  franchise  tax,  etc.,  which  must  be  i3rovicled  and  paid 
until  the  property  is  completely  a  ''going  concern." 

5.  Discounts  on  securities,  brokerage  or  other  customary  and 
necessary  expenditures  in  connection  with  financing  such  an 
undertaking  and  marketing  securities. 

6.  Reasonable  promotion  profit,  possibly  also  compensation 
for  risk  of  capital. 

7.  Working  capital. 

It  will  be  recognized  in  connection  with  the  above  items  that 
although  intangible  in  nature  and  having  nothing  to  show 
therefore  which  can  be  ''seen  and  felt,"  nevertheless  these 
expenditures  are  just  as  definite,  just  as  necessary  and  just  as 
indisputably  a  part  of  the  whole  value  of  corporation  property 
as  are  the  physical  elements. 

Fair  Rate,  Fair  Value,  Fair  Return.— The  word  "fair" 
implies  justice.  What  may  be  a  just  and  fair  rate,  a  fair 
value  or  a  fair  return  under  a  given  set  of  conditions  may  be 
equally  unreasonable  and  unfair  under  other  conditions  of 
climate,  density  of  population,  cost  of  fuel  or  labor  and 
other  modifying  circumstances.  Gas,  sold  by  the  cubic 
foot  in  both  places,  does  not  contain  nearly  as  many  heat 
units  in  Denver,  Colorado,  by  reason  of  being  about  a  mile 
above  sea  level,  as  does  the  same  volume  in  New  York,  con- 
sequently the  same  price  per  thousand  feet  in  both  places, 
means  nothing.  Fuel  at  Norfolk,  Va.,  will  produce  the  same 
amount  of  steam  at  half  the  cost,  compared  with  Boston,  Mass. 
The  prevalent  state  laws  requiring  a  uniform  2  cent  passenger 
late  per  mile  without  regard  to  cost  of  construction,  quality 
of  service  or  density  of  population  results  in  handsome  earnings 
for  some  railroads  and  serious  deficiencies  for  others.  Rate 
regislation  and  attempted  regulation  without  critical  study  of 
local  conditions  or  a  full  analysis  of  operating  statistics  will 
never  result  in  a  fair  rate.  The  determination  of  what  may  be  a 
fair  rate  under  given  conditions  is  a  complex  question.  It 
depends  upon  two  fundamental  facts  to  be  ascertained. 

First. — On  what  is  a  fair  value  for  the  property  being 
used. 

Second. — On  what  amount  of  return  beyond  operating  and 
all  other  expenses  it  is  fair  to  allow  the  owners  for  the  use  of 
their  property. 

Thus  it  will  be  seen  that  all  considerations  are  qualified  by  the 


GLOSSARY  21 

adjective  which  is  applied  so  easily,  but  the  exact  limitation  and 
definition  of  which,  for  any  particular  case  is  always  difficult  and 
oft  times  impossible  of  exact  ascertainment.  The  courts  have 
held  that  before  deciding  what  in  a  given  case  may  be  a  fair  rate, 
it  is  necessary  to  determine  both  fair  value  and  fair  return. 
Fortunately  the  Supreme  Court*  has  explicitly  stated  that  the 
factors  to  be  considered  in  determining  fair  value  are: 

■ "    (a)  Original  cost. 

(b)  Amount  expended  in  permanent  improvements. 

(c)  The  amount  and  market  value  of  stock  and  bonds. 

(d)  Replacement  cost. 

(e)  Probable  earning  capacity. 

(f)  Operating  expenses. 

Of  all  the  elements  set  forth  above  to  be  considered  in  deter- 
mining fair  value,  replacement  cost  is  becoming  the  most  con- 
trolling and  important.  It  is  obtained  through  a  valuation  of  the 
property,  which  can  only  be  made  with  creditable  fairness  by  the 
exercise  of  wide  experience,  good  judgment,  honesty  and  fairness 
on  the  part  of  the  individual  making  up  the  appraisal. 

By  giving  due  weight  to  the  relative  accuracy  and  importance 
of  each  of  these  elements  of  value,  the  true  or  fair  value  is  de- 
termined. When  this  is  fixed,  the  fair  return  to  be  allowed  is 
established  by  a  consideration  of  local  condition,  risks  of  the 
particular  business  in  question  and  other  attending  circumstances. 
From  a  knowledge  of  the  fair  value  of,  and  return  on,  the  property 
under  consideration  and  from  a  knowledge  of  income,  it  is 
possible  to  fix  a  rate  which  is  proper  and  fair  to  charge  for  the 
service  rendered. 

Good  Will. — A  monopoly,  as  is  generally  admitted,  has  no  good 
will  which  can  be  evaluated,  and  the  courts  have  sustained  this 
view.  Good  will  can  only  result  where  competition  exists  and 
the  tendency  of  the  times  is  to  make  no  allowance  for  this  ele- 
ment in  a  public  utility  valuation;  it  being  considered  that  good 
will  belongs  rather  to  industrial  enterprises  where  its  value  is  de- 
termined by  the  profitableness  of  the  business;  namely,  capitaliz- 
ing the  net  income.  Good  will  has  no  value  which  must  be 
considered  in  dealing  with  the  subject  of  Depreciation. 

'  Covington  and  Lexington  Turnpike  vs.  Sanford,  164  U.  S.,  578. 


22  VALUATION  OF  PUBLIC  UTILITIES 

Franchises. — As  the  term  indicates,  it  is  the  right  to  "do  busi- 
ness." Formerly  franchises  were  considered  more  or  less  valu- 
able assets  and  in  some  instances,  have  been  recognized  and 
allowed  for  by  the  courts;  but  the  present  tendency,  largely  by 
reason  of  legislative  enactments,  is  to  prohibit  the  capitalization 
of  franchises  beyond  the  absolute  expenditures  made  in  good 
faith  in  obtaining  said  franchises.  Depreciation  or  amortization 
of  franchises  depends  on  their  terms  and  has  no  relation  to  de- 
terioration of  the  physical  property  although  the  expiration  of  a 
franchise  might  easily  reduce  service  value. 

Depreciation. — Webster  defines  "depreciation"  as  the  "act 
or  state  of  lessening  the  worth  of."  The  Century  Dictionary 
says  it  is  "a  fall  in  value;  reduction  of  worth."  In  appraisal 
work  it  means  a  reduction  in  utility,  expressed  in  dollars,  due 
to  any  deterioration  in  physical  plant  by  reason  of 

(a)  Wear  and  tear. 

(b)  Age  or  physical  decay. 

(c)  Inadequacy. 

(d)  Obsolescence. 

(e)  Deferred  maintenance. 

The  term  "Amortization"  has  been  used  somewhat  indis- 
criminately for  depreciation,  but  it  may  more  properly  be 
applied  only  to  the  laying  aside  of  funds  at  a  uniform  rate  for 
the  writing  off  of  intangible  values  or  the  ultimate  replacement 
of  capital  investment;  and  in  this  sense  alone,  will  be  used  by 
the  author. 

The  term  depreciation,  always  used  in  connection  with  a 
reduction  of  value,  has,  however,  three  distinct  and  separate 
shades  of  meaning  so  that  the  term  must  be  qualified  when 
used  to  distinguish  which  one  of  the  following  meanings  is 
intended: 

First. — The  annual  amount  expressed,  as  a  percentage  or  in 
dollars,  that  should  be  laid  aside  to  renew  or  replace  the  article 
in  question  at  the  time  of  its  abandonment.  In  this  use  of  the 
term,  the  loss  of  worth,  which  can  be  made  good  or  replaced 
through  ordinary  maintenance  or  repairs,  is  not  included  as  a 
part  of  depreciation,  but  is  provided  as  a  part  of  the  regular 
operating  expenses.  This,  until  comparatively  recently,  was  the 
more  common  use  of  the  term  depreciation  which  was  applied 
particularly  to  renewals  and  i^eplacements.     Used  in  this  sense. 


GLOSSARY  23 

the  term  "depreciation"  is  somewhat  academic  and  theoretical, 
and  may  or  may  not  represent  any  actual  financial  outlay. 

"Depreciation  does  not  represent  actual  expenditure  but  the  amount 
properly  reserved  to  offset  the  loss  in  value  occurring  to  the  operating 
plant."^ 

Second. — ^The  annual  amount  expressed,  as  a  percentage  or  in 
dollars,  that  should  be  laid  aside  to  renew  or  replace  the  article 
in  question  at  the  time  of  its  abandonment,  plus  the  annual 
expense  of  maintenance  and  repair  expended  in  removing  such 
part  of  depreciation  as  is  practicable  and  good  economy.  This 
then  includes  all  classes  of  "lessening  of  worth"  and  is  the 
application  of  the  term  preferred  by  the  writer  and  used  by 
the  New  York  Public  Service  Commissions  in  their  rules  for 
uniform  accounting: 

"The  next  important  step  to  be  taken  by  the  corporation  is  to  deter- 
mine what  amount  should  be  set  aside  month  by  month  to  cover  wear 
and  tear,  obsolescence  and  inadequacy — repairs,  renewals,  replacements 
and  other  depreciation."^ 

Such  use  of  depreciation  covers  all  classes  or  causes  of  deteri- 
oration, regardless  of  the  source  or  method  of  worth  reduction 
or  by  what  means  it  may  or  may  not  be  removed. 

Third. — The  total  amount — it  may  be  the  sum  of  several  years 
of  depreciation — expressed  in  a  percentage  or  in  dollars,  that 
must  be  deducted  from  the  "original  cost"  or  the  "cost  to  re- 
produce new"  in  order  to  obtain  the  present  value.  The  de- 
termination of  the  amount  of  depreciation  at  a  given  time,  in 
connection  with  the  valuation  of  a  property,  is  merely  the 
summation  of  the  annual  accrued  amounts  of  deterioration, 
which,  from  the  time  of  installation,  have  been  continuously 
reducing  the  worth  of  the  property,  less  such  value  as  has  been 
restored  by  expenditures  for  wear  and  tear,  replacements  and 
renewals. 

Classes  of  Depreciation. — The  subject  of  Depreciation  from 
an  engineering — not  an  accountant's  standpoint — practically 
divides  itself  into  several  classes,  as  follows: 

'  Cunningham  vs.  Chippewa  Falls  Water  Works  and  Lighting  Company 
Railroad  Commission  of  Wisconsin. 

2  Report  of  the  Commission  adopted  December  8,  1908,  in  the  matter 
of  "Uniform  Systems  of  Accounts  for  Public  Service  Corporations." 


24  VALUATION  OF  PUBLIC  UTILITIES 

(a)  Wear  and  Tear,  or  Maintenance. — This  includes  such  de- 
preciation as  may  ordinarily  be  removed  or  offset  by  proper 
expenditures  at  such  time  as  the  worn  out  parts  may  be  econom- 
ically replaced.  Few  parts  of  physical  property  in  use  ever 
become  completely  worn  out;  after  a  certain  amount  of  wear,  a 
point  is  reached  at  which  good  engineering  requires  their  replace- 
ment; they  may  be  still  further  used,  but  only  at  the  cost  of 
economy  or  safety.  With  different  pieces  of  apparatus,  deprecia- 
tion due  to  wear  and  tear  varies  widely.  It  may  amount  to  a 
small  percentage  of  the  whole,  as  for  example  the  bearings  in  a 
generator;  or  it  may  amount  to  a  very  large  percentage,  as  for 
example  the  blading  of  a  steam  turbine  or  the  insulation  of  a 
high-tension  leaded  cable.  This  class  of  depreciation  may  be 
considered  to  include  that  due  to  accidents,  such  as  would  result 
from  lightning,  fire,  or  other  sudden  damage. 

Even  before  the  moment  original  construction  is  complete, 
deterioration  begins  and  a  more  or  less  depreciated  condition  of 
the  installation  as  a  whole  always  exists,  which  condition  will- 
increase  until  good  engineering  indicates  that  the  time  has  come 
to  offset  wear  and  tear  by  repair.  Such  depreciation,  as  related 
to  service  value,  not  always  as  to  sales  value,  can  usually  be 
completely  compensated  for  by  expenditures,  small,  relatively  to 
the  value  of  the  entire  propert}'.  It  has  been  the  almost  universal 
custom  to  include  the  expense  of  removing  wear  and  tear,  the 
most  obvious  class  of  depreciation,  as  part  of  regular  operating 
expense. 

(6)  Age,  Physical  Decay  or  Decrepitude. — Depreciation  of  this 
sort  is  due  to  the  aging  of  apparatus  that  usually  has  alife  extending 
over  a  period  of  years.  Property  that  is  short-lived  usually  passes 
away  through  "wear  and  tear."  In  many  instances,  age  depre- 
ciation will  be  the  same  whether  the  apparatus  is  used  or  unused; 
i.e.,  a  boiler  or  an  insulated  wire  will  deteriorate  through  the 
action  of  the  elements  practically  as  rapidly  when  standing  idle 
as  when  in  continued  service.  After  a  given  number  of  years, 
the  expense  of  maintenance  on  very  many  pieces  of  property 
will  become  so  large  that  it  is  more  economical  to  abandon  than 
replace  them.  For  example,  car  bodies  will  in  the  course  of  time 
become  so  racked  that  they  must  be  abandoned  because  the  new 
cost  less  than  repairing  the  old. 

(c)  Inadequacy  or  Supersession. — This  class  of  depreciation 
arises  from  increased  demands  of  service  so  as  to  render  the  prop- 


GLOSSARY  25 

erty  in  use  inconvenient  or  uneconomical  for  continuance  of 
operation,  although  in  every  way  capable  of  performing  the  serv- 
ice for  which  it  was  installed.  For  example,  when  street  railway 
service  has  increased  to  such  an  extent  that  many  and  frequent 
small  single-truck  cars  are  required  to  do  the  work  that  can  be 
done  by  larger  double-truck  cars  at  less  cost  and  with  less  inter- 
ference with  street  traffic,  both  economy  and  necessity  compel 
superseding  the  smaller  equipment  with  the  larger,  and  thus 
through  inadequacy,  investment  in  the  smaller  equipment  is 
depreciated  before  the  property  is  worn  out  or  becomes  decrepit. 
Furthermore,  the  introduction  of  heavier  cars  may  make  in- 
adequate the  rails  and  car  barns.  Inadequacy  may  and  does 
take  place  without  regard  to  the  length  of  time  the  property 
has  been  in  use  or  to  the  amount  of  service  rendered.  Inade- 
quacy, although  confused  b}'  some  authorities  with  obsolescence, 
is  generally  distinct  from  the  latter  and  usually  arises  from  a 
different  cause,  although  in  some  cases  related  to  and  scarcely 
distinguishable  from  obsolescence. 

Obsolescence. — Obsolescence  means  the  depreciation  of  property 
through  the  development  of  something  newer  and  either  more 
economical  or  more  of  a  fad.  Like  inadequacy,  it  may  necessi- 
tate the  abandonment  of  property  long  before  it  is  worn  out  and 
in  many  cases,  arises  largeh'  from  demands  of  the  public.  What 
is  obsolete  in  one  place  ma}'  not  be  effected  by  obsolescence  in 
another.  Note,  for  example,  the  recent  introduction  of  P.  A.  Y. 
E.  cars  in  the  larger  cities  or  the  use  of  open-bench  cars  in  the 
Borough  of  Bronx,  where  they  are  considered  good  practice, 
while  at  the  same  time  they  are  by  many  considered  obsolete 
for  the  Borough  of  Manhattan,  all  within  New  York  City.  The 
substitution  of  underground  conduits  and  cables  for  aerial 
construction  required  by  public  authorities  is  another  illustra- 
tion of  this  class  of  depreciation  which  cannot  be  prevented  by 
maintenance  or  offset  by  repairs;  it  can  only  be  met  by  complete 
replacement.  By  reason  of  rapid  advance  and  development  in 
the  art,  obsolescence  has  heretofore  probably  caused  the  greatest 
expenditure  for  depreciation  account,  unless  it  is  wear  and  tear; 
but  as  time  goes  on,  obsolescence  may  become  a  less  important 
factor,  though  it  would  probably  be  at  the  cost  of  rapid  improve- 
ment and  development. 

"  There  is  also  the  question  of  obsolescence,  or  such  changes  as  become 
necessary  because  of  new  inventions  or  because  of  changes  in  the  art. 


26  VALUATION  OF  PUBLIC  UTILITIES 

In  the  electrical  field  in  particular,  such  changes  are  very  frequent. 
They  often  make  it  necessary  to  discard  machinery  and  other  equip- 
ment of  various  kinds  long  before  they  are  worn  out.  This  is  an  ex- 
pense that  is  of  the  same  nature  as  depreciation  and  is  usuallj^  classed 
as  such.  It  should  be  charged  to  operating  expenses  the  same  as  other 
depreciation."  ^ 

(d)  Deferred  Maintenance. — The  several  classes  of  deprecia- 
tion hereinbefore  referred  to  assume  that  the  property  will  be 
kept  in  good  operating  condition  and  efficiency.  If  the  condition 
of  the  property  is  permitted  to  lapse  beyond  that  of  safety  or 
economy  in  operation  there  results  a  condition  due  to  neglect  of 
proper  maintenance  and  regular  repairs,  a  condition  known  as 
"Deferred  Maintenance,"  which  is  measured  by  the  expenditure 
that  may  be  necessary  to  offset  such  neglect  and  restore  the 
property  to  good  operating  condition.  Deferred  maintenance 
is  only  another  term  for  neglect  and  always  reflects  to  the 
discredit  of  the  management  or  the  financial  ability  of  a 
corporation. 

Going  Value. — "Going  Value,"  "Going  Concern  Value,"  and 
"Going  Concern"  are  several  terms  that  have  been  used  to  refer 
to  an  intangible  value  beyond  that  of  the  physical  plant  attaching 
to  live,  active  and  operating  property.  The  value  in  question  is 
generally  held  to  relate  to  and  is  evaluated  from  a  consideration 
of  earnings.  It  has  been  defined  as  "the  cost  of  acquiring  a 
given  income,"  also  as  "the  present  worth  of  the  amount  by 
which  the  anticipated  profits  of  a  going  plant,  operating  at 
reasonable  rates,  exceed  the  present  worth  of  the  anticipated 
profits  of  a  similar  hypothical  starting  plant,  operating  at 
those  same  rates."  There  is  no  element  included  in  the  total 
valuation  of  utility  property  concerning  which  there  is  greater 
difference  of  opinion  or  more  controversy  and  indefiniteness 
with  regard  to  methods  of  its  evaluation. 

The  Wisconsin  Commission,  as  well  as  some  of  the  highest 
courts  have  clearly  and  definitely  recognized  the  value  attach- 
ing to  the  building  up  of  an  income  producing  business  and 
allowed  such  value  as  a  part  of  capitalization.  To  determine 
the  worth  of  a  going  business  in  dollars,  the  Wisconsin  Com- 
mission has  repeatedly  estimated,  in  connection  with  the  par- 

'  Decision  of  the  Railroad  Commission  of  Wisconsin,  June  2,  1908,  City 
of  Dodgeville  vs.  Dodgeville  Electric  Light  and  Power  Company. 


GLOSSARY  27 

ticular  property  under  consideration,  the  necessary  expenditure 
since  the  business  was  started,  made  in  carrying  the  organization 
to  the  present  state  of  income,  allowing  a  fair  rate  of  return, 
necessary  depreciation,  operating  expenses,  etc.,  and  compared 
such  estimate  with  the  actual  record  made  by  the  Company, 
including  all  surplus  earnings,  whether  paid  out  as  dividends  or 
not,  and  by  such  comparison  determined  whether  or  not  there 
remains  an  excess  in  the  estimated  result  as  compared  with  the 
actual  result,  if  so,  that  difference  is  considered  proper  for 
capitalization  as  "going  value."  This  theory  being  based  upon 
cost  in  the  past,  cannot  in  strict  logic  be  used  in  connection 
with  values  which  may  be  made  up  to  represent  the  cost  of 
reproduction,  yet  the  AVisconsin  Commission  has  so  combined 
the  actual  cost  with  estimated  cost  of  reproduction  as  appar- 
entl}'  the  only  practicable  method  of  deriving  fair  value. 

Judge  Lurton  in  the  decision  of  the  Supreme  Court  in  the 
Omaha  Water  Works'  case,  decided  May  31,  1910,  says: 

"The  option  to  purchase  excluded  any  value  on  account  of  unexpired 
franchise,  but  it  did  not  limit  the  value  to  the  bare  bones  of  the  plant, 
its  physical  properties,  such  as  its  lands,  its  machinery,  its  water-pipes 
or  settling  reservoirs,  nor  to  what  it  would  take  to  reproduce  each  of  its 
physical  features.  The  value,  in  equity  and  justice,  must  include 
whatever  is  contributed  by  the  fact  of  the  connection  of  the  items  mak- 
ing a  complete  and  operating  plant. 

"The  difference  between  a  dead  plant  and  a  live  one  is  a  real  value, 
and  is  independent  of  any  franchise  to  go  on,  or  any  mere  good  will  as 
between  such  a  plant  and  its  customers.  That  kind  of  good  will  as 
suggested  in  Wilcox  vs.  Consolidated  Gas  Company  (212  U.  S.,  19),  is 
of  little  or  no  commercial  value  when  the  business  is,  as  here,  a  natural 
monopoly,  with  which  the  customer  must  deal,  whether  he  will  or  not. 
That  there  is  a  difference  between  even  the  cost  of  duplication,  less 
depreciation,  of  the  elements  making  up  the  water  company  plant  and 
the  commercial  value  of  the  business  as  a  going  concern  is  evident. 
Such  an  allowance  was  upheld  in  National  Water  Works  Company  vs. 
Kansas  City  (62  Fed.  853)  where  the  opinion  was  by  Mr.  Justice  Brewer. 
We  can  add  nothing  to  the  reasoning  of  the  learned  Justice,  and  shall  not 
try  to.  That  case  has  been  approved  and  followed  in  Gloucester  Water 
Supply  Company  vs.  Gloucester  (179  Mass.,  365,  and  60  N.  E.,  977)  and 
Norwich  Gas  and  Electric  Company  vs.  Norwich  (76  Conn.  565).  No 
such  question  was  considered  in  Knoxville  Water  Company  (212  U.  S., 
1)  or  in  Wilcox  vs.  Consohdated  Gas  Company  (212  U.  S.,  19).     Both 


28  VALUATION  OF  PUBLIC  UTILITIES 

cases  were  rate  cases  and  did  not  concern  the  ascertainment  of  value 
under  contracts  of  sale."^ 

Public  Utility. — Corporations  are  of  two  quite  distinct  classes, 
those  engaged  in  industrial  enterprises  more  or  less  private  and 
competative  and  those  operating  as  public  or  quasi  public  service 
organizations,  known  as  utility  corporations,  and  monopolist  in 
fact  or  tendency.  All  corporations  are  created  in  accordance 
with  laws,  more  or  less  restrictive,  for  certain  specific  objects  set 
forth  in  their  charters  or  articles  of  incorporation,  but  utility 
corporations  have  certain  rights  or  franchises  accorded  them 
which  do  not  belong  to  other  corporations  such  as  authoi-ity 
to  occupy  public  streets  or  other  public  property,  the  right  of 
eminent  domain,  i.e.,  to  take  private  property  for  their  own  use 
in  consideration  of  the  payment  of  an  equitable  price  for  the 
property  taken,  the  duty  of  obligation  to  extend  and  continue 
service  even  though  such  extension  and  continuance  is  not 
desired,^  with  other  conditions.  The  objective,  in  the  crea- 
tion of  all  corporations  is  financial  gain,  which  has  heretofore 
been  generally  permitted,  without  other  limitation  than  com- 
petition, but  latterly  the  utilities  have  tended  to  become  mon- 
opolies through  buying  or  crushing  competitors  and  as  a  result 
there  has  developed  the  theory  that  such  corporations,  accorded 
practically  the  exclusive  business  of  serving  the  public,  if  al- 
lowed a  fair  return  on  the  value  of  their  property  are  entitled 
to  nothing  further  than  that  fair  return. 

In  order  to  carry  out  this  program  of  limiting  earnings  to  a 
fair  return  on  the  fair  value  of  the  property,  it  has  been  necessary 
to  ascertain  the  fair  value  of  various  utility  properties  resulting 
in  one  of  the  causes  of  the  very  general  demand  for  appraisals 
and  valuations. 

It  will  be  recognized  that  the  operation  of  a  utility  under  the 
"fair  return"  theory  entitles  it 

(a)  To  earn  a  reasonable  profit  on  the  total  fair  value,  tan- 
gible and  intangible,  of  its  property,  over  and  beyond  the  proper 
expenses  of  operation  including  taxes  and  the  various  classes  of 
depreciation. 

(b)  To  render  good  service  to  the  public  at  the  minimum 
rate  which  will  insure,  under  good  management,  earning  the 

air  return  on  the  fair  value  of  the  property. 

'Omaha  vs.  Omaha  Water  Co.,  218  U.  S.,  180. 
^Weatherly  vs.   Capital   City  Water  Co.,   Ala.   22  So.   140. 


GLOSSARY  29 

"Summarized,  these  elemental  principles  are,  the  right  of  the  com- 
pany to  derive  a  fair  income  based  upon  the  fair  value  of  the  property 
at  tiie  time  it  is  being  used  for  the  public,  taking  into  account  the  cost  of 
maintenance  and  depreciation  and  the  current  operating  expenses,  and 
the  right  of  the  public  to  demand  that  the  rates  shall  be  no  higher  than 
the  services  are  worth  to  them,  not  in  the  aggregate,  but  as  individuals.'" 

The  primary  reason  for  prohibiting  an  unlimited  rate  of 
return  and  allowing  merely  a  fair  rate  considering  local  condi- 
tions and  exigencies,  results  from  the  fact  that  a  corporation 
which  is  a  monopoly  is  in  a  position  to  raise  rates  arbitrarily  and 
thus  earn  excessive  and  unfair  profits  while  an  industrial  cor- 
poration ordinarily  is  precluded  from  unfair  profits  through 
the  workings  of  competition.  Moreover  the  public,  being  com- 
pelled to  purchase  from  a  monopoly,  insures  its  earnings  with 
consequent  decrease  in  risk  to  the  success  of  the  corporation. 

Averages. — The  term  "average"  is  often  used  by  engineers 
in  connection  with  life,  quantities  and  prices  of  physical  property, 
in  the  high  sounding  but  loose  way  the  term  "fair"  is  used  by 
the  legal  fraternity  in  connection  with  rates  and  values. 

If  based  on  proper  premises  and  not  used  to  conceal  omission 
in  working  out  laborious  details,  average  figures  may  be  most 
useful  and  instructive.  Frequently,  however,  the  average 
figures  so  called  are  merely  guesses  or  perhaps  estimates  and  not 
the  result  of  averaging  anything  but  opinion. 

The  mere  averaging  of  simple  figures,  as  for  example,  the  lengths 
of  several  pieces  of  timber  is  a  simple  and  generally  understood 
process  of  arithmetic  and  division,  but  obtaining  the  true  or 
"weighted"  average  of  complex  quantities  is  much  more  of  a 
problem  and  the  source  of  frequent  error  on  the  part  of  those 
not  fully  understanding  the  matter.  Obtaining  the  weighted 
average  in  relation  to  values  is  particularly  important,  when 
figuring  the  life  of  property  which  one  may  be  desirous  of  valuing 
or  depreciating. 

Suppose  it  is  desired  to  ascertain  the  average  life  of  a  number 
of  different  buildings,  one  a  temporary  structure,  another  a 
wood  building,  the  third  of  brick  and  a  fourth  of  monolithic 
concrete.  Assuming  that  for  the  buildings  named  the  estimated 
useful  lives  will  be  respectively  5  years,  20  years,  50  years  and 
100  years,  what  will  be  the  average  life  of  the  buildings  with 

'Maine  Supreme  Court,  1893. 


30 


VALUATION  OF  PUBLIC  UTILITIES 


respect  to  their  values  if  the  first  cost  $5,000,  the  second  $10,000, 
the  third  $20,000  and  the  fourth  $25,000.  Many  people  would 
erroneously  figure  the  average  life,  by  the  following  method,  to 
be  43.75  vears. 


Type 
Temporary  building, 
Wood  building, 
Brick  building, 
Concrete  building, 


Estimated  life 

5  years. 

20  years. 

50  years. 

100  years. 


17c 


175  years. 


=  43.75  years. 


Other  persons  more  experienced  with  figures  would  take  into 
consideration  the  values  as  follows: 


Type 
Temporary  building, 
Wood  building, 
Brick  building, 
Concrete  building, 


Estimated  life 

5  years  time 

20  years  time 

50  years  time 

100  years  time 


Cost 

§5000=      .525,000 

.$10000=    S200,000 

1520000  =  §1,000,000 

§25000  =  §2,500,000 


§60000  =  .§3,725,000 


3,725.000 
60,000 


=  62.08  years. 


But  to  obtain  the  true  or  weighted  average  life  there  must 
be  taken  into  consideration  the  total  dollar  value  involved  in 
the  maximum  life  period,  as  follows: 


Type 

Estimated  life 

Cost 

Temporary  building, 

5  years 

§5000 

Wood  building, 

20  years 

§10000 

Brick  building, 

50  years 

§20000 

Concrete  building, 

100  years 

§25000 

No.   renewals  in   100 

Estimated  cost  for 

years 

100  years 

Dollar  years 

20 

§100,000 

§500,000 

5 

50,000 

1,000,000 

2 

40,000 

2,000.000 

1 

25,000 

2,500,000 

§215,000 

§6,000,000 

§6,000,000 

— —  =  27.9  years. 

GLOSSARY  31 

The  above  correct  average  life  may  also  be  derived  as  follows: 

$5000  divided  by  5  years  =  S1000  per  year 
10000  divided  by  20  years  =  500  per  year 
20000  divided  by  50  years  =  400  per  year 
25000  divided  by  100  years  =     250  per  year 


$60000  2150  =27.9  years 

which  is  the  average  estimated  life  of  the  property  as  a  whole, 
based  on  assumed  lives  of  the  several  buildings  as  indicated. 


CH.\PTER  111 
PUBLIC  SERVICE  COMMISSIONS 

Utility  Commissions. — In  a  broad  sense  the  term  Commission 
has  come  to  include  Federal,  State  and  Municipal  Committees 
or  Boards  having  supervision  of  so-called  Public  Utility  Corpora- 
tions, such  as  railroad,  gas,  electric-light,  street-railway,  water- 
power,  water-works,  express,  telephone,  telegraph  and  even 
pipe-line,  wharfage  or  compress  companies.  Although  few 
important  valuations  have  yet  been  made  by  Municipal  and  none 
by  Federal  Commissions,  much  of  the  appraisal  work  that  has 
been  done  by  the  State  Commissions  is  of  such  high  quality, 
although  wrought  out,  in  many  instances,  under  disadvantageous 
circumstances,  that  it  should  receive  due  credit  and  recognition. 
The  opinions,  in  most  cases,  show  such  thought  and  painstaking 
effort;  the  conclusions  are  usually  so  logical  and  the  decisions 
based  on  valuations  have  been  so  frequently  accepted  as  to  give 
them  a  status  comparable  to  those  of  a  Court  of  Justice,  that 
some  knowledge  of  the  procedure  and  appraisal  work  of  Public 
Service  Commissions  is  essential  to  a  broad  study  of  the  subject 
of  valuations. 

Control  of  corporations  was  for  many  years  unsuccessfully 
attempted  through  direct  legislative  enactment.  Such  methods 
alone  are  not  sufficiently  precise  or  adequate  to  cope  with  the 
complicated,  constantly  shifting  and  rapidly  developing  condi- 
tions of  the  social,  political  and  economic  life  of  the  American 
people.  More  recently,  control  of  public  utility  corporations 
has  been  especiallj^  undertaken  through  National  or  State  Com- 
missions, usually  clothed  with  radical  authority.  The  success 
attending  this  method  of  regulation,  where  attempted,  has  been 
so  marked  that  it  has  now  become  generally  recognized  as  the 
most  effective  means  yet  devised  for  corporation  control.  The 
experiment  was  first  tried  by  the  State  of  Massachusetts,  which 
created  a  Board  of  Railway  Commissioners  as  far  back  as  the 
early  sixties.  In  1885  a  Gas  and  Electric  Light  Commission 
was  created  and  given  jurisdiction-  over  Gas  and  Electric  Com- 
panies, but  the  Telegraph  and  Telephone  Companies  are  con- 
trolled by  a   Board  of  Highway  Commissioners.     The  Massa- 

32 


PUBLIC  SERVICE  COMMISSIONS  33 

chusetts  Commissions  have  interested  themselves  particularly 
in  matters  relating  to  the  incorporation  capitalization  and 
issuance  of  securities  of  Massachusetts  Companies  the  quality 
of  service  rendered  and  have  done  little  with  regard  to  making 
appraisals  of  property. 

Other  states  soon  followed  the  lead  taken  by  Massachusetts. 

Minnesota  in  1899  created  a  Railroad  and  Warehouse  Com- 
mission, which  was  given  supervision  over  Express  Companies, 
Grain  Elevator  and  Commission  Houses,  but  not  over  Electric 
Light,  Street  Railway,  Telephone  or  Power  Companies.  The 
investigation  of  express  rates  l^y  the  Minnesota  Commission  is 
said  to  have  cost  some  $30,000  and  is  w^ithout  question  the  most 
exhaustive  investigation,  with  regard  to  Express  Companies, 
ever  made  in  this  country.  The  Railway  valuation  by  the 
Minnesota  Commission,  made  for  rate  making  purposes,  took 
three  years  to  complete,  and  established  a  precedent  in  this  class 
of  works. 

Texas  in  1891  appointed  its  Railroad  Commission  for  the 
purpose  of  ascertaining 

"as  early  as  practicable  the  amount  of  money  expended  to  procure 
rights  of  way  and  the  amount  of  money  it  would  require  to  re-construct 
the  railroad  bed,  track  and  depots  and  transportation  and  to  replace  all 
the  physical  property  belonging  to  the  railroads." 

This  Commission  has  already  appraised  over  93  per  cent,  of  the 
main  trackage  of  the  State. 

New  York  comparatively  early  established  its  Railroad 
Commission  and  in  1905  a  commission  controlling  the  Gas  and 
Electric  Corporations  but  in  1907  both  Commissions  were 
replaced  by  two  Public  Service  Commissions,  having  control  of 
railroads,  gas  and  electric  utilities  but  not  water  companies.  One 
commission  has  supervision  over  Corporations  within  the  City 
of  greater  New  York  and  the  other  over  the  balance  of  the  State, 
including  Telephone  corporations  within  New  York  City.  Dur- 
ing the  year  just  closed  the  commission  of  the  Second  District, 
authorized  securities  for  the  corporations  under  its  jurisdiction 
amounting  to  $162,581,718.52,  as  follows:  Steam  railroads, 
$119,718,937.52;  electric  railways,  $24,323,500;  gas  and  electric 
corporations,  $17,952,581;  telephone  companies,  $581,700.  The 
total  amount  authorized  during  the  four  and  one-half  years  of 
the  Commission's  existence  is  $566,460,507.86. 

3 


34  VALUATION  OF  PUBLIC  UTILITIES 

The  Commission  of  the  First  District  for  the  year  1911  received 
reports  from  153  utility  companies.  Some  $79,944,177  worth  of 
securities  were  passed  on  for  approval,  but  the  Commission  only 
allowed  820,548,819.  The  more  important  work  of  the  Commis- 
sion at  present  is  in  connection  with  Street  Railway,  Elevated 
and  Subway  transportation,  the  Commission  laying  out  routes 
and  awarding  contracts  for  Municipal  Subway  construction  to 
the  amount  of  S29,000,000  during  the  year  1911.  The  passen- 
gers carried  on  the  surface,  elevated  and  subway  lines  aggre- 
gated 1,603,908,253  affording  a  revenue  of  $83,751,414  for  the 
year  1911. 

Wisconsin  started  with  a  Railroad  Commission,  later  placing 
the  control  of  Express  Companies  under  the  Commission  in  1905, 
and  two  years  afterward  including  Gas,  Electric,  Heating,  Water, 
Telegraph,  Telephone,  Street  and  Interurban  Railways,  and 
more  recently  Water  Power  Companies.  The  law  makes  no  dis- 
tinction between  privately  and  municipally  owned  utilities, 
demanding  the  same  methods  of  accounting  from  and  applying 
the  same  regulations  to  both.  The  Commission  began  its 
original  valuation  of  the  steam  railroads  of  the  State  in  1903, 
which  was  soon  thereafter  completed.  In  1909  it  made  a  re- 
valuation of  the  railroads  which  showed  a  considerable  increase 
compared  with  the  one  made  six  years  previously.  Appraisals 
of  other  utilities  are  constantly  being  made,  as  the  commis- 
sion makes  it  a  rule  to  ascertain  the  value  of  corporation  property 
before  fixing  rates.  The  work  of  the  Wisconsin  Commission  is 
pre-eminent.  The  Commissioners  have  been  men  of  standing, 
integrity  and  industry  and  their  decisions  give  evidence  of  pains- 
taking effort  and  much  originality.  As  indicating  the  care  with 
which  they  handle  their  work  it  may  be  stated  that  out  of  a 
thousand  utilities  in  the  State,  the  Commission  has  appraised 
less  than  one  hundred  to  date,  although  that  means  a  very  much 
larger  proportion  of  the  total  investment  in  corporation  property 
than  the  relative  figures  indicate. 

In  1905  the  State  of  Washington  created  a  Railway  Commis- 
sion, later  enlarging  it  to  a  Public  Commission  having  jurisdiction 
over  practically  all  utilities  including  Warehouse  Companies  but 
excepting  municipally  owned  plants.  The  railway  Commission 
has  made  appraisals  of  the  larger  proportion  of  the  Railways  in 
that  State. 

Oregon   started   with    a    Railway   Commission   in    1907    and 


PUBLIC  SERVICE  COMMISSIONS  35 

endeavored  to  create  a  Public  Service  Commission  in  1911,  but 
the  matter  has  been  held  a^vaiting  a  vote  of  the  people  next 
autumn. 

Nebraska  created  a  Railway  Commission  in  1906,  having 
jurisdiction  over  Telephone  and  Telegraph  Companies  in  addition 
to  the  Railroads,  Steam,  Interurban  and  Street  as  well  as  Irriga- 
tion Companies,  Agitation  over  a  Commission  having  control 
of  all  utilities  has  begun. 

The  Railway  Commission  of  Georgia  was  created  in  1879  and 
in  1907  was  given  jurisdiction  over  Express  Companies,  Gas  and 
Electric  Light,  Power,  Cotton  Compress,  Dock,  Telephone  and 
Telegraph  Companies.  The  Commission  has  interested  itself 
more  particularly  in  regard  to  rates  and  stock  and  bond  issues, 
than  in  appraisals  and  valuations. 

Maryland  created  a  full  fledged  Public  Service  Commission  in 
1910,  having  oversight  of  280  corporations  to  which  during  the 
past  year  it  authorized  the  issuance  of  $48,000,000  of  securities. 
The  Commission  is  now  actively  engaged  in  physical  appraisals 
and  rate  c^uestions. 

Oklahoma  has  a  Commission  created  in  1907,  having  jurisdic- 
tion over  railways  and  other  utilities  including  Express,  Oil  Pipe 
and  Water  Companies.  This  Commission  is  not  as  liberally 
provided  with  powers  as  the  Commissions  of  most  other  States 
and  has  petitioned  the  legislature  for  larger  authority. 

California  has  recently  passed  a  public  utility  law  becoming 
effective  in  March  giving  its  State  Railroad  Commission  control 
of  all  service  corporations  and  it  is  expected,  with  the  broad 
powers  accorded,  the  Commission  will  undertake  work  on  a 
broad  scale. 

For  some  years  the  State  of  Connecticut  has  had  a  Railroad 
Commission  and  in  1911  the  legislature  created  a  new  Commis- 
sion to  have  charge  of  all  Public  utilities,  thus  superseding  the 
Railroad  Commission.  The  Governor  appointed  to  the  new . 
Commission  the  members  of  the  old  Commission  so  that  its 
methods  and  personnel  are  practically  continuous. 

Vermont,  Colorado,  Florida,  Georgia,  Iowa,  Illinois,  Indiana, 
Maine,  Pennsylvania,  Missouri,  South  Carolina  and  Rhode  Island 
have  each  had  a  Railroad  Commission  for  some  years  but  their 
work  is  largely  routine. 

In  1909  Arizona,  and  during  the  year  1911  the  states  of  Ohio, 
Kansas,  Maryland,   New  Hampshire,  Nevada  and  New  Jersey 


36  VALUATION  OF  PUBLIC  UTILITIES 

created  Commissions  to  control  and  regulate  public  utilities  on 
principles  similar  to  those  embodied  in  the  laws  of  the  states 
of  New  York  and  Wisconsin.  The  penalties  provided  for  a  vio- 
lation of  the  Kansas  law,  which  in  some  instances  becomes  a 
felony,  are  exceptionally  rigorous.  At  present  in  almost  every 
state  where  Commissions  are  not  already  in  existence  the  legis- 
latures have  been  or  are  considering  the  question  of  creating 
some  sort  of  Public  Utility  Commission. 

Reasons  for  the  Creation  of  Commissions. — For  many  years 
competition  has  been  held  to  be  the  proper  means  for  regulating 
rates;  believers  in  the  Sherman  Act  and  its  enforcement  still 
cling  to  that  theory,  but  the  extravagant  waste  and  loss  involved 
in  acceptance  of  this  policy,  as  applied  to  public  utilities  at  least, 
has,  as  a  general  rule,  always  resulted  in  an  increased  cost  to  the 
consumer.  Regulation  of  rates  by  governmental  authority,  is  of 
course  incompatible  with  free  competition.  It  would  seem  to 
be  self-evident  that  the  theory  on  which  regulation  is  based  can 
only  be  sustained  by  the  recognition  of  a  monopoly.  Whatever 
may  be  said  against  governmental  regulation  of  private  industrial 
corporations,  which  are  perhaps  automatically  controlled  through 
competition,  does  not  apply  to  what  are  termed  Public  Utility 
Corporations,  which  are,  or  properly  may  be,  monopolies. 

The  necessity  for  regulation  by  the  public  arises,  in  the  first 
place,  because  the  exercise  of  franchise  rights  by  certain  cor- 
porations, while  academically  not  exclusive,  is  nevertheless 
practically  non-competitive;  therefore,  one  of  the  ordinary 
checks  arising  through  competition  does  not  in  such  cases  apply. 
Unlike  the  individual  or  ordinary  business  corporation,  a  public 
utility  corporation  frequently  cannot  begin  business  without 
being  organized  under  special  and  specific  laws.  Such  corpora- 
tions may  be  granted  unusual  franchises;  for  example,  the  right 
of  eminent  domain,  and  are  recognized  as  existing  for  service  to 
the  public  in  a  manner,  and  with  privileges  entirely  unique  and 
distinct  from  those  of  ordinary  business  undertakings,  and  are 
therefore  acknowledgedly  subject  to  special  regulation  and 
control.  Even  ordinary  business  corporations  which  have  no 
special  privileges  granted,  if  uncontrolled,  may,  as  the  result  of 
unusual  commercial  acumen  linked  with  a  large  aggregation  of 
capital — illustrated  for  example,  in  the  case  of  the  so-called 
"trusts" — create  a  wrong  which  organized  society  will  very 
properly  step  in  and  limit,  control,  or  prohibit.      Business  trusts 


PUBLIC  SERVICE  COMMISSIONS  37 

are  in  effect  monopolies,  because  competition  as  a  practical  matter 
is  out  of  the  cjuestion,  and  hence  regulation  in  their  cases  is  also 
essentially  necessary.  The  underlying  principle  of  monopolies, 
cooperation,  is  a  legitimate  product  of  our  present  civilization; 
it  may  be  controlled  but  should  not  l^e  prohibited. 

In  the  second  place,  regulation  of  utility  cooperations  compet- 
ing for  the  same  business  is  required  from  the  very  nature  of  the 
business  itself.  If  they  are  allowed  to  compete  fully  and  freely, 
experience  indicates  that  they  will  ultimately  engage  in  a  war  of 
annihilation,  the  expense  of  which  is  in  the  end  borne  by  the 
security  holder  or  the  public.  Up  to  a  few  years  ago,  political 
economists  believed  and  argued  that  the  only  regulation  required 
for  all  commercial  operations  was  free  and  unrestricted  com- 
petition: 

"Because  the  experience  of  mankind  had  not  developed  essential 
monopolies,  and  it  was  believed  that  every  problem  which  would  arise 
would  be  solved  by  giving  full  play  to  the  spirit  of  competition.  *  *  * 

"Whether  that  system  of  deaUng  with  railroad  corporations  will 
succeed  or  not  can  be  ascertained  by  viewing  their  history  in  the  State 
of  New  York,  and  the  experience  which  was  had  in  this  State  demon- 
strated that  it  did  not  work  to  the  advantage  of  the  public  and  that  the 
evils  connected  with  the  system  were  simply  enormous  and  unendurable. 
Competition  could  not  exist  upon  railroads."^ 

The  principle  of  State  or  Federal  control  and  regulation  of 
corporations  is  not  new,  although  the  application  of  this  principle 
has  recently  been  greatly  broadened.  Liberty  has  so  largely 
grown  to  mean  unrestricted  license  the  recent  statement  of  the 
old  fact  that  the  Public  can  demand  and  take  from  the  individual, 
and  even  more  from  the  corporation,  anything  ''  from  his  pocket- 
book  to  his  life  inclusive"  was  as  startling  as  true.  The  only 
precedent  to  the  taking  is  the  public  necessity  with  the  proper 
method  of  remuneration.  In  theory  then,  regulation  is  correct 
if  only  the  application  is  practicable  and  fair. 

Control  of  monopolies  must  therefore  be  regulated  by  the 
legislature,  but  as  is  generally  recognized,  the  legislature  has  no 
authority  to  delegate  this  right,  which  includes  both  judicial  and 
legislative  functions,  to  an  administrative  board;  practically, 
however,   it    is  possible  for   a  legislature  to  effect   regulation 

'F.  W.  Stevens,  address  A.  I.  E.  E.  dinner,  1908 


38  VALUATION  OF  PUBLIC  UTILITIES 

through  a  committee  or  commission  by  defining  the  powers  and 
determining  the  policy  of  its  committee  or  commission.  The 
result  is  in  effect  that  the  commission  ascertains  the  facts  and 
conditions  in  each  case  and  administers  the  law  as  laid  down 
by  the  legislature,  therefore  its  function  is  neither  judicial  nor 
legislative. 

The  relative  function  of  the  Commission  in  its  relation  to 
the  legislature  has  been  established  by  the  Supreme  Court  of 
Wisconsin. 

"The  division  of  the  governmental  powers  into  executive,  legislative 
and  judicial,  while  of  great  importance  in  the  creation  or  organization  of 
a  State,  and  from  the  viewpoint  of  institutional  law  and  otherwise,  is 
not  an  exact  classification.  No  such  exact  delimitation  of  governmental 
powers  is  possible.  In  the  process  of  enacting  a  law  there  is  frequently 
necessary  the  preliminary  determination  of  a  fact  or  group  of  facts  by 
the  legislature,  and  it  is  well  settled  that  the  legislature  may  declare  the 
general  rule  of  law  to  be  in  force  and  take  effect  upon  the  subsequent 
establishment  of  the  facts  necessary  to  make  it  operative  or  to  call  for 
its  application.  *  *  *  The  legislature  may  delegate  any  power,  not 
legislative,  which  it  may  itself  rightfully  exercise.  This  power  to 
ascertain  facts  is  such  a  power  as  may  be  delegated.  *  *  *  This  law 
establishes,  and  thenceforth  assumes,  the  existence  of  rates,  charges, 
classifications  and  services,  discoverable  by  investigation  but  undis- 
closed, which  are  exactly  reasonable  and  just.  It  commits  to  the  Rail- 
road Commission  the  duty  to  ascertain  and  disclose  that  particular  rate, 
charge,  classification  or  service.  The  law  intends  that  there  is  only  one 
rate  charge  or  service  that  is  reasonable  and  just.  When  the  order  of  the 
commission  is  set  aside  by  the  court,  it  is  because  this  reasonable  and 
just  rate,  charge,  classification  or  service  has  not  yet  been  correctly 
ascertained.  When  the  order  of  the  commission  has  been  rescinded  or 
changed  by  the  commission  because  of  changed  conditions  it  is  because 
there  is  a  new  reasonable  rate  to  be  ascertained  and  disclosed  applicable 
to  such  new  conditions  and  fixed  by  force  of  law  immediately  when  the 
new  conditions  came  into  existence.  But  the  theory  and  the  mandate 
of  the  law  is  that  this  point  is  always  discoverable  although  not  always 
discovered.  Until  it  is  discovered  and  made  known  the  former  rates  and 
service  prevail.  The  order  of  the  commission  is  prima  facie  evidence 
that  the  rate,  charge  or  service  found  and  fixed  by  it  is  the  particular 
rate,  charge  or  service  declared  by  the  legislature  in  general  terms  to  be 
lawful  and  to  be  in  force.  If  it  were  conceded  that  the  commission  had 
power  or  discretion  to  fix  one  of  several  rates,  either  of  which  would  be 
just  and  reasonable,  it  would  be  hard  to  say  that  this  was  not  a  delega- 
tion of  pure  legislative  power  to  the  commission.    But  the  theory  of 


PUBLIC  SERVICE  COMMISSIONS  39 

this  law  is  to  delegate  to  the  commission  the  power  to  ascertain  facts 
and  to  make  mere  administrative  regulations. 

*  *  *  *  *  *  * 

"The  notion  that  commissions  of  this  kind  should  be  closely  restricted 
by  the  courts,  and  that-  justice  in  our  day  can  be  had  only  in  courts,  is 
not  conducive  to  the  best  results.  Justice  dwells  with  us  as  with  the 
fathers;  it  is  not  exclusively  the  attribute  of  any  office  or  class,  it  re- 
sponds more  rapidly  to  confidence  than  to  criticism,  and  there  is  no 
reason  why  the  members  of  the  great  Railroad  Commission  of  this  State 
should  not  develop  and  establish  a  system  of  rules  and  precedents  as 
wise  and  beneficent  within  their  sphere  of  action  as  those  established 
by  the  early  common-law  judges.  We  find  the  statute  well  framed  to 
bring  this  about. "^ 

The  argument  has  been  made  that  corporation  control  and 
limitation  of  earnings  by  Public  Service  Commissions  will 
remove  all  incentive  for  development,  originality,  economy  or 
improvement,  that  when  a  corporation  has  reached  the  maximum 
rate  of  return  allowed  there  no  longer  remains  any  reason  or 
ambition  for  increasing  earnings. 

That  a  just  return  on  the  value  of  the  investment  or  property 
is  not  alone  the  basis  to  be  considered  in  fixing  the  proper  rates 
or  allowable  earnings  of  a  corporation  is  indicated  by  published 
statements  and  decisions  of  more  than  one  Commission. 

Not  only  the  propriety,  but  the  necessity,  of  permitting 
compensation  for  good  service  and  efficient  management  has 
been  stated  by  the  Public  Service  Commission  of  New  York, 
First  District,  in  its  discussion  of  ''Uniform  Systems  of  Accounts." 

"It  is  not  the  purpose  of  public  regulation  by  reducing  rates  to  take 
from  a  corporation  all  the  proceeds  of  enterprise  and  thrift  that  it  may 
earn  beyond  a  reasonable  dividend.  If  a  thrifty  and  intelligent  corpo- 
ration can,  at  a  smaller  expense  to  itself,  supply  a  public  service,  than  a 
careless  and  incompetent  corporation,  the  former  should  not  be  compelled 
to  charge  the  public  less  than  the  latter.  To  do  so  is  to  discourage 
progress  and  economy." 

Despite  this  fair  statement  of  intention  an  examination  of 
the  rulings  of  state  commissions  shows  a  tendency  to  place  all 
corporations  on  the  same  footing  as  regards  the  returns  to 
investors;  that  is,  regardless  of  whether  capital  has  been  invested 
and  conserved  in  a  judicious  and  intelligent  manner  or  in  an 

'  Minneapolis,  St.  Paul  &  Sault  Ste.  Marie  Ily.  Co.  vs.  Railroad  Com- 
mission of  Wisconsin  136,  Wisconsin,  146. 


40  VALUATION  OF  PUBLIC  UTILITIES 

inefficient  way,  the  precedents  established  indicate  that  about 
the  same  profit  will  be  allowed  in  either  case.  Such  procedure, 
of  course,  does  away  with  all  incentive  to  improve  the  earnings 
by  cutting  down  operating  expenses,  or  to  decrease  the  price,  or 
introduce  new  apparatus  or  modern  methods.  It  removes  the 
stimulus  heretofore  existing  with  the  individual,  to  make  the 
very  best  showing  possible,  and  hence  is  a  reasonable,  valid,  and 
practical  objection  to  control  by  Commissions.  One  method  of 
offsetting  this  very  decided  disadvantage  has  been  evolved  by 
the  application  of  the  London  sliding  scale,  so-called  because 
originating  in  London,  England,  and  now  in  use  in  a  number  of 
places,  particularly  in  Boston,  Mass.  The  principle  is  a  profit- 
sharing  one,  in  which  the  investors  are  entitled  to  a  definite  rate 
on  their  investment  with  a  fixed  price  for  their  product  to  the 
consumer.  Every  decrease  in  price,  as  for  example  5  cents  per 
unit  in  the  case  of  gas  at  Boston,  entitles  the  investors  to  an 
increase  of  1  per  cent,  in  their  rate  of  dividend.  An  objection 
to  this  plan  is  that  while  it  may  be  perfectly  fair  for  a  term  of 
years,  improvements  in  methods  of  manufacturing  may  so  largely 
reduce  the  manufacturing  costs  as  to  entitle  the  investors  to 
abnormally  large  dividends,  at  which  time  a  readjustment  of 
the  base  for  price  of  product  and  rate  of  dividend  would  result  in 
seriously  depreciating  the  securities  held  by  the  owner  at  the 
time  of  such  adjustment.  This  London  scale,  however,  is  at 
present  the  best  practical  method  evolved  for  automatically 
adjusting  prices  and  profits  as  between  the  public  and  the 
corporation. 

Admitting  that  Commissions  are  in  existence,  that  they  are 
likely  to  remain  and  exercise  supervision  of  public  utilities  it  is 
apparent  that  they  will  require  and  insist  upon  appraisals  of 
corporate  utility  property,  perhaps  both  tangible  and  intangible, 
certainly  the  tangible,  when  there  are  involved  questions  which 
effect  rates,  also  usually  when  considering  questions  of  sale  or 
capitalization  and  sometimes  even  in  tax  cases. 

Results  Accomplished  by  Commissions. — Individuals  interested 
in  corporations  in  many  instances  presuppose  that  regulation  by 
Public  Utility  Commissions  means  unfair  rulings  against  the 
corporations  and  espousal  of  the  cause  of  the  people.  In  case 
Public  Service  Commissions  should  degenerate  into  mere  machines 
for  use  by  the  demagogue  or  politician,  such  results  may  be 
feared,  but  so  many  of  the  State  Commissions  are  constituted  of 


I 
I 


PUBLIC  SERVICE  COMMISSIONS  41 

honorable  men  whose  intentions  and  integrity  are  of  the  highest, 
whatever  may  be  said  of  their  lack  of  knowledge  or  experience, 
that  actually  there  is  little  cause  to  complain  that  the  corporations 
alone  are  receiving  unfair  treatment.  Mistakes  have  been  made 
and  improper  decisions  have  been  rendered,  but  these  are  im- 
partially distributed  as  between  the  corporations  and  the  public. 
The  Commissions  in  existence  show  by  their  record  that  on  the 
whole  both  the  corporations  and  the  public  may  expect  impartial 
treatment. 

The  corporations  usually  desire  to  operate  as  a  monopoly,  and 
the  creation  of  Commissions  is  now  predicated  on  the  assumption 
that  a  monopoly  will  be  recognized  and  allowed  under  proper 
regulation  and  control. 

The  attitude  of  the  Public  Service  Commissions  with  regard  to 
the  avoidance  of  competition  and  the  recognition  of  a  controlled 
monopoly,  has  been  repeatedly  affirmed  notably  in  the  decision 
of  the  Public  Service  Commission  of  New  York,  First  District  in 
the  Long  Acre  case^  and  of  the  Second  District  in  the  case  of  the 
Binghampton  Light,  Heat  &  Power  Company,  where  that  Com- 
mission said: 

"A  Public  Service  Corporation  is  in  its  nature  an  essential  monopoly." 
*  *  *  "A  monopoly  by  the  very  fact  of  being  a  monopoly  gets  all 
the  business  there  is."  *  *  *  "With  a  monopoly,  if  the  density 
of  the  business  gives  extravagant  profits,  it  is  the  duty  of  the  state 
to  cut  down  the  price  so  that  the  monopoly  obtains  only  reasonable 
returns.  The  evil  of  the  monopolies  is  that  uncontrolled  they  can 
charge  prices  which  will  give  excessive  and  unreasonable  profits."^ 

This  properly  means  that  while  on  the  one  hand  adequate 
service  will  be  required  and  a  limit  to  returns  on  property  will 
be  fixed  by  the  investment,  value  and  proportionate  risk  of  the 
business,  on  the  other  hand  property  rights  will  be  protected 
and  conserved,  competition  and  waste  eliminated  and  a  fair 
return  allowed. 

Corporations  that  have  been  found  lax  on  mismanaged  as  to 
the  upkeep  of  their  physical  property,  that  were  employing 
improper  accounting  methods  resulting  in  the  impairment  of 
property  or  capitalization  have  been  compelled  to  correct  their 

'Long  Acre  Electric  Light  and  Power  Co.  Order  607.  Report,  1908, 
Vol.  II,  p.  139.     Public  Service  Commission  of  New  York,  First  District. 

-Application  of  Binghamton  Light,  Heat  &  Power  Co.  Decision  Aug.  4, 
1909.     Public  Service  Commission  of  New  York,  Second  District. 


42  VALUATION  OF  PUBLIC  UTILITIES 

methods.  The  mcreased  stability  of  public  utility  securities 
due  to  their  issuance  under  regulation  has  caused  their  acceptance 
by  fiduciary  corporations  in  a  way  that  was  impossible  before 
regulation  was  undertaken.  The  methods  of  accounting  and 
publicity  insisted  upon  by  Commissions  result  in  a  systematization 
and  classification  of  corporation  expenditure,  which  afford  as 
never  before,  a  knowledge  of  and  confidence  in  costs  not  heretofore 
possible  to  either  the  public  or  the  corporations.  Abnormal  and 
unfair  bond  issues  have  been  prevented,  increased  comfort  and 
safety  in  operation  both  to  the  public  and  employees  have  been 
secured,  maintenance  of  equipment  and  provision  for  deprecia- 
tion funds  have  been  insisted  upon,  while  extortionate  rates  on 
the  one  hand  and  a  fair  return  to  the  investor  on  the  other  hand, 
even  through  an  increase  of  rates,  have  been  insured  where  the 
properties  can  be  made  to  produce  such  results. 

Some  of  the  universally  acknowledged  beneficial  results  of  the 
appointment  of  State  Commissions  has  been  the  retirement  of 
Public  Service  Corporations  from  interest  in  and  control  of 
politics,  and  the  abandonment  of  differential  rates,  discrimina- 
tion and  rebates  to  favored  customers.  Prof.  H.  B.  Mayer, 
member  of  the  Interstate  Commerce  Commission  and  formerly 
Chairman  of  the  Wisconsin  Commission,  says  of  this  matter 

"The  whole  State  of  Wisconsin  was  streaked  and  plastered  with 
discrimination  in  the  rate  utilities" 

and  it  has  been  estimated  that  this  favoritism  cost  the  Wisconsin 
Companies  some  $2,000,000  annually.  In  New  York  State  the 
railway  and  lighting  companies,  which  were  accustomed  to  con- 
tribute liberally  to  campaign  funds,  have  practically  discontinued 
doing  so  since  the  commissions  were  appointed,  resulting  in  a 
purification  of  public  affairs,  regarding  which  there  is  no  question. 
The  Governor  of  Wisconsin  in  a  recent  statement  said: 

"As  evidence  of  prosperity  under  commission  regulation  the  last  an- 
nual report  of  the  Wisconsin  Commission  shows  that  during  the  year 
the  operating  revenues  of  electric  utilities  increased  20  per  cent.,  their 
net  income  29  per  cent.,  and  new  construction  for  the  year  145  per  cent. 
The  operating  revenues  of  water  utilities  meanwhile  increased  7  per 
cent.,  their  income  13  per  cent.,  and  new  construction  24  per  cent.  Gas 
utilities  increased  their  operating  revenues  3  per  cent.,  tlieir  net  income 
15  per  cent.,  and  new  construction  24  per  cent.  Telephone  utilities  in- 
creased their  operating  revenue  11  per  cent.,  their  net  income  9  per  cent., 


PUBLIC  SERVICE  COMMISSIONS  43 

and  construction  for  the  year  14  per  cent.  Railway  and  traction  lines 
on  the  average  increased  their  operating  revenues  13  per  cent.,  their  net 
income  8  per  cent.,  and  construction  an  equal  amount.  All  utilities  in 
Wisconsin  are  in  a  more  flourishing  condition  now  than  ever  before  and 
are  planning  to  extend  their  operations  far  into  the  future.  Taking  a 
longer  period,  as  we  may  in  the  case  of  railway  regulation,  which  was 
begun  earlier,  the  results  are  even  more  striking.  For  the  fiscal  year 
ended  June  30,  1905,  the  total  mileage  of  railroads  in  Wisconsin  was  6931 
and  the  total  operating  revenue  $50,144,702.43.  This  was  the  year  im- 
mediately before  commission  regulation  of  railroads  began.  Five  j'ears 
later,  or  during  the  fiscal  year  ended  June  30,  1910,  the  total  mileage 
had  increased  to  7209,  an  increase  of  278  miles,  and  the  total  operating 
revenues  amounted  to  $65,055,928.76,  an  increase  of  nearly  $15,000,000. 
Thus,  notwithstanding  the  decrease  in  transportation  rates  and  improve- 
ment in  service  enforced  by  the  Railroad  Commission,  the  operating 
revenues  of  the  railroads  of  Wisconsin  increased  approximately  30  per 
cent.  As  an  indication  of  the  general  prosperity  of  the  State  meanwhile 
it  may  be  worth  mentioning  that  under  these  new  poUcies  the  deposits  in 
commercial  and  savings  banks  in  Wisconsin  increased  in  round  numbers 
during  this  five  years  from  $187,000,000  to  $276,000,000,  or  51  per  cent." 

Progressive  and  honest  corporation  management  working  with 
a  fair  and  intelligent  Commission  will  accomplish  the  best  things 
both  for  the  corporation  and  the  public.  That  this  view^  is  being 
accepted  by  the  corporation  men  themselves  is  indicated  for  ex- 
ample by  the  following  quotation  from  the  last  annual  report  of 
President  Vail  to  the  Stockholders  of  the  American  Telephone  & 
Telegraph  Company : 

"  Public  control  or  regulation  of  Public  Service  Corporations  by  perma- 
nent commissions  has  come,  and  come  to  stay.  State  control  or  regulation 
should  be  of  such  a  character  as  to  encourage  the  highest  possible  stand- 
ards in  plant,  the  utmost  extension  of  facilities,  rigid  economy  in  opera- 
tion, rates  that  will  warrant  the  highest  wages  for  the  best  service,  and 
such  certainty  of  return  on  investment  as  will  induce  investors  not  only 
to  retain  their  securities,  but  to  supply  at  all  times  all  the  capital  needed 
to  meet  the  demands  of  the  public.  Such  control  and  regulation  can 
and  should  stop  all  abuses  of  capitalization,  of  extortion,  of  overcharge, 
or  of  unreasonable  division  of  profits." 

The  remarkable  commentary  to  be  made  on  the  preceding  is 
that  the  good  work  being  accomplished  by  Commissions  and  the 
justice  of  their  orders  and  rulings  is  based  on  an  appraisal  of  the 
properties  under  their  supervision,  already  made  or  tentatively 
assumed,  w^hich  establishes  the  essential  fairness  of  their  decisions. 


44  VALUATION  OF  PUBLIC  UTILITIES 

The  National  Association  of  Railway  Commissioners  believing 
that  the  first  step  to  be  determined,  in  fixing  the  basis  upon 
which  a  carrier  can  fairly  claim  the  right  to  earn,  is  a  "true  and 
reliable  valuation  of  the  tangible  properties"  and  in  order  to 
ascertain  exactly  what  had  been  done  in  the  way  of  physical 
valuation  and  taxation  of  railways  by  the  different  states,  sent  a 
communication  to  each,  receiving  the  following  interesting  replies.^ 

Arkansas. — No  valuation  unclertaken. 

Arizona. — Commission  just  created. 

Connecticut.— No  physical  valuation  ever  made.  The  properties 
are  taxed  as  follows,  quoting  from  letter: 

"  The  value  for  taxation  is  ascertained  by  adding  the  amount  of  bonds 
and  floating  indebtedness  to  the  market  value  of  the  stock.  In  case  of 
a  line  running  into  more  than  one  State,  the  statutes  provide  for  prorat- 
ing the  value  according  to  mileage ;  also  for  deductions  of  amounts  spent 
for  properties  wholly  within  the  State." 

California. — No  valuation  undertaken  by  the  commission.  Properties 
are  taxed  on  the  ad  valorem  basis.  Values  fixed  by  the  State  Board  of 
Equalization. 

Colorado. — No  physical  valuation  ever  made.  Properties  are  taxed 
on  the  ad  valorem  basis  as  follows:  Railroad  companies  make  returns 
to  the  state  board  of  equalization,  showing — 

First. — Stock  and  bond  value  of  entire  road,  crediting  to  Colorado 
its  mileage  proportion  of  main  track  within  the  State. 

Second. — Capitalization  net  earnings  in  Colorado  on  an  8  jier  cent, 
basis. 

Third. — The  physical  value  as  returned  by  the  corporations  them- 
selves. An  average  of  three  above  values  is  taken  as  the  basis  for 
taxation. 

Florida. — Nothing  done  by  the  Commission  in  the  matter  of  valuing 
properties. 

Georgia. — No  physical  valuation  ever  made.  The  value  for  taxing 
purposes  is  made  by  the  comptroller-general.  In  case  any  dispute 
arises  with  the  railway  company  as  to  the  value  fixed  by  him,  a  board  of 
arbitrators  is  provided  for. 

Iowa. — Nothing  has  been  undertaken  by  the  commission. 

Illinois. — No  valuation  undertaken  by  the  commission.  Properties 
are  taxed  on  the  ad  valorem  basis,  the  valuations  being  fixed  by  the 
state  board  of  equalization. 

Indiana. — No  physical  valuation  has  been  undertaken. 

Idaho. — Has  no  commission. 

*  Proceedings  of  the  twenty-first  Annual  Convention  National  Association 
of  Railway  Commissioners.     Nov.  16-19,  1909. 


J 


PUBLIC  SERVICE  COMMISSIONS  45 

Kansas.^No  physical  valuation  has  been  undertaken.  Properties 
are  taxed  on  the  ad  valorem  basis  by  the  state  tax  commission. 

Louisiana. — No  valuation  undertaken. 

Maine.— The  commission  is  not  charged  with  the  duty  of  valuing  the 
railroad  property. 

Michigan. — The  state  tax  commission  has  made  a  complete  physical 
valuation  for  taxation  purposes. 

Missouri. — No  physical  valuation  ever  made.  The  state  board  of 
equalization  values  the  property  for  taxing  purposes  by  fixing  an  arbi- 
trary assessment  per  main-line  mileage,  terminals  valued  separately ;  also 
fixing  a  franchise  value;  quoting  from  the  letter  of  the  commission  as 
follows : 

"In  short,  the  railroad  property  in  this  State  is  assessed  on  its  main- 
line mileage,  its  terminals,  and  its  franchises,  but  no  rule  has  been 
adopted  by  which  the  values  used  are  ascertained.  Missouri  law 
requires  all  property  to  be  assessed  at  its  actual  cash  value,  but  it  has 
become  the  practice  in  this  State  to  assess  upon  a  valuation  which  shall 
secure  revenue  sufficient  to  supply  the  needs  of  each  county;  hence  it  is 
that  there  is  no  uniformity  in  the  assessment,  each  county  being  assessed 
as  the  needs  of  the  county  demand." 

Montana. — No  valuation  ever  made. 

]\Iassachusetts. — The  board  has  not  attempted  any  valuation  for 
rate-making  purposes.  Properties  are  taxed  upon  the  ad  valorem  plan. 
The  information  contained  in  the  letter  from  the  tax  commissioner 
throws  so  much  light  upon  tlie  taxing  of  railroad  property  that  it  is 
given  in  full,  as  follows: 

"The  theory  of  the  Massachusetts  law  is  that  the  taxable  value  of  a 
railroad  is  properly  found  by  ascertaining  what  the  public  will  pay  for 
the  railroad  upon  our  tax  date,  namely.  May  1.  What  the  public  will 
pay  is  easily  computed  by  multiplying  the  number  of  shares  outstanding 
by  the  price  at  which  these  shares  sell  on  the  market  on  ]\Iay  1.  The 
result  of  such  a  multiplication  is  a  value  called  in  our  statute  '  the  value 
of  the  corporate  franchises.'  We  ehminate  from  this  value  such  part 
of  it  as  is  proportional  to  the  fraction  of  the  mileage  of  the  railroad  situ- 
ated outside  of  this  Commonwealth  upon  the  theory  that  for  the  pur- 
poses of  taxation  Massachusetts  is  not  concerned  with  the  value  of  the 
railroad  not  in  Massachusetts.  From  the  value  remaining  after  this 
deduction,  we  deduct  further  the  value  of  the  real  estate  and  machinery 
of  the  railroad  taxed  by  the  cities  or  towns  of  Massachusetts  through 
which  the  railroad  passes  or  in  which  it  owns  such  real  estate  and 
machinery.  Machinery  in  this  connection  is  onlj^  such  fixed  machinery 
as  is  attached  to  or  erected  upon  real  estate  owned  by  the  corporation. 
Every  railroad  corporation  operating  in  Massachusetts  has  been  given 
bv  the  Commonwealth  a  right  of  wav  five  rods  wide  all  of  the  distance 


46  VALUATION  OF  PUBLIC  UTILITIES 

between  the  terminals.  The  cities  and  towns  are  not  allowed  to  tax  the 
corporation  for  any  real  estate  or  machinery  within  this  right  of  way. 
The  cities  and  towns,  therefore,  tax  the  corporations  only  upon  such  real 
estate  and  machinery  as  is  owned  by  the  corporation  outside  of  this 
right  of  way.  To  give  a  concrete  example  of  the  method  by  which  the 
tax  is  computed  we  will  assume  that  a  railroad  corporation  has  out- 
standing upon  May  1,  100,000  shares  of  stock  which  are  selling  in  the 
market  on  that  day  at  $200.  The  value  of  the  corporation  franchise 
of  this  railroad  is  found  to  be,  therefore,  $20,000,000.  We  find  that 
one-fourth  of  the  mileage  of  the  railroad  is  outside  of  Massachusetts. 
Therefore,  we  eliminate  one-fourth  of  this  $20,000,000  and  have  a 
resulting  value  of  $15,000,000.  The  cities  and  towns  of  the  Common- 
wealth report  to  us  in  the  aggregate  that  they  tax  the  corporation  upon 
real  estate  and  machinery  owned  by  it  within  their  limits  of  $7,000,000. 
We  subtract  this  $7,000,000  from  the  $15,000,000  and  have  left 
$8,000,000  as  being  the  value  of  the  corporate  excess  upon  which  the 
Commonwealth  assesses  a  tax  at  the  rate  prevailing  for  the  given  year. 
The  rate  this  year  is  $17.35  per  thousand  of  valuation. 

"  It  thus  appears  that  a  railroad  corporation  pays  taxes,  first,  to  the 
cities  and  towns  in  which  it  owns  real  estate  and  fixed  machinery,  and, 
second,  to  the  Commonwealth  upon  whatever  other  net  value  (if  any)  is 
shown  by  the  selling  price  of  its  shares  of  stock. 

"The  value  of  the  real  estate  and  machinery  of  the  corporation  situ- 
ated in  the  cities  and  towns  is  determined  in  every  case  by  the  board  of 
assessors  elected  by  and  serving  each  city  or  town. 

'  Other  than  as  herein  specified  there  has  never  been  made  any  de- 
termination of  the  value  of  the  property  of  railroad  corporations  in 
Massachusetts." 

Minnesota. — The  commission  has  undertaken  to  make  a  physical 
valuation  of  all  the  railway  properties.  This  was  completed  December 
20,  1908.-  The  cost  of  the  work  averaged  $8.12  per  mile  of  main  line 
roadway.  The  railway  properties  are  taxed  upon  the  gross  earnings 
basis. 

New  York. — First  district:  Confined  to  New  York  City  and  comprises 
the  city  railway  lines.  The  public-service  commission  has  undertaken 
a  physical  valuation  of  the  above  properties.  This  is  now  nearly  com- 
pleted. These  values  are  for  use  in  any  proper  case  in  which  values  are 
one  of  the  factors. 

Second  district:  The  commission  has  as  yet  not  undertaken  the  work 
of  valuing  railroad  properties. 

New  Jersey. — No  valuation  has  been  undertaken  by  the  commission. 
A  special  commission  has  been  named  which  is  now  engaged  in  valuing 
the  property  for  taxation  purposes. 

New  Hampshire. — No  valuation  has  been  made. 


PUBLIC  SERVICE  COMMISSIONS  47 

North  Dakota. — No  valuation  undertaken. 

Nevada. — No  physical  valuation  has  ever  been  made.  The  following 
extract  from  the  letter  of  the  commission  indicates'  how  the  taxes  are 
levied  and  affords  an  example  showing  the  advantage  of  having  a  reli- 
able valuation  made : 

"  The 'taxation  of  railroads  in  Nevada  is  fixed  by  the  State  Board  of 
Assessors,  composed  of  the  assessors  of  each  county,  with  the  governor 
presiding,  which  meets  on  the  second  Monday  of  January  each  year. 
At  every  meeting  of  the  board  each  railroad  is  taken  up  separately  and 
the  valuation  of  the  same  is  fixed  at  the  discretion  of  the  board,  the 
capitalization,  bonded  indebtedness,  cost  per  mile,  and  earning  power 
of  each  road  being  taken  into  consideration  before  an  assessment  is 
fixed. 

'■  At  the  last  meeting  of  the  board  of  assessors,  held  on  the  second  Mon- 
day of  January,  1909,  the  governor  called  upon  the  railroad  commission 
for  such  data  as  it  had  concerning  the  valuation  and  earning  power  of  all 
railroads  operating  in  the  State.  This  information  was  readily  furnished 
by  the  commission  from  the  annual  reports  on  file,  and  from  testimony 
submitted  by  several  of  the  companies  in  suits  that  were  pending  at  the 
time  in  the  United  States  circuit  court,  wherein  the  railroads  were  attack- 
ing the  maximum  freight  rates  fixed  by  the  railroad-commission  law  of 
1907.  This  testimony  tended  to  show  the  high  valuation  of  railroads  in 
Nevada,  for  the  purpose  of  rate  making  and  was  greatly  at  variance 
with  the  figures  submitted  by  the  several  companies  before  the  board  of 
assessors  for  the  purpose  of  assessment. 

"As  an  example  of  the  great  disparity  between  the  assessed  valuation 
of  railroad  property  and  the  value  of  the  same  for  rate-making  purposes 
we  will  cite  the  case  of  the  Central  Pacific  Railway,  leased  by  the 
Southern  Pacific  Company.  In  the  affidavits  of  Mr.  C.  B.  Seger,  the 
auditor  of  the  Southern  Pacific  Company,  it  was  testified  that  the  value 
of  the  Central  Pacific  Railway  in  Nevada  was  166,253,187.21,  or 
$146,936.73  per  mile  of  line,  while  the  assessment  of  this  property  in 
1908  was,  on  the  main  line,  $17,500  a  mile,  and  on  sidetracks,  rolling 
stock,  and  other  property  the  value  was  fixed  at  $6,691.36  a  mile,  mak- 
ing a  total  assessment  of  $24,191.36  a  mile  as  against  the  value  for 
rate-making  purposes  of  $146,936.73." 

Oklahoma. — The  commission  is  now  engaged  in  making  physical 
valuation,  expecting  to  have  same  completed  within  two  years'  time. 

Ohio. — No  physical  valuation  has  ever  been  made.  Properties  are 
taxed  on  the  ad  valorem  basis  and  are  valued  by  boards  of  county 
auditors  of  the  counties  through  which  the  road  runs.  These  assess- 
ments are  afterwards  passed  upon  by  the  state  board  of  equalization. 
The  value  as  fixed  by  this  board  is  afterwards  apportioned  to  each  county 
on  a  mileage  prorate. 


48  VALUATION  OF  PUBLIC  UTILITIES 

Oregon. — The  commission  is  now  engaged  in  making  a  physical 
valuation  of  all  the  railway  properties.  Properties  are  taxed  on  the  ad 
valorem  basis,  the  valuation  being  fixed  by  the  various  county  assessors. 

Pennsylvania. — No  physical  valuation  ever  made.  Properties  are 
taxed  on  the  ad  valorem  basis  and  are  valued  by  the  auditor-general 
taking  the  average  market  value  of  the  stocks  and  bonds  each  year. 

Rhode  Island. — No  valuation  undertaken  by  the  railroad  commis- 
sioner. Railroad  property  is  taxed  on  the  ad  valorem  basis,  the  values 
being  fixed  by  each  town  separately,  the  various  towns  taxing  the 
railroad  property  located  within  their  respective  territory. 

South  Dakota. — The  commission  is  now  engaged  in  making  a  com- 
plete physical  valuation  of  the  railroad  properties. 

South  Carolina. — No  valuation  undertaken  by  the  commission. 
Properties  are  taxed  on  the  ad  valorem  basis.  The  value  is  an  arbitrary 
one,  being  fixed  by  the  comptroller-general,  secretary  of  state,  attorney- 
general,  state  treasurer,  and  chairman  of  the  railroad  commission. 

Texas. — The  commission  undertakes  to  value  all  the  physical  proper- 
ties of  the  railway  company  and  keep  the  values  corrected  up  to  date. 
These  values  are  made  with  a  view  of  being  used  by  the  commission 
chiefly  for  regulating  the  use  of  stocks  and  bonds.  The  values  are 
available  for  and  are  used  by  the  tax  commission  when  undertaking  to 
fix  the  values  for  taxing  purposes. 

Vermont. — No  valuation  undertaken. 

Wisconsin. — No  valuation  made  by  the  railway  commission.  Prop- 
erties are  taxed  on  the  ad  valorem  basis  and  a  complete  physical  valu- 
ation has  been  made  by  the  tax  commission. 

Wyoming. — No  railway  commission. 

Washington. — Complete  i^hysical  valuation  has  been  made  by  the 
commission.  In  this  State  the  commission  has  gone  farther  than  the 
authorities  in  any  other  State,  in  that  the  values  after  having  been 
completed  have  been  separated,  showing  the  value  to  be  assigned  to  the 
state  uses  and  interstate  uses  when  being  considered  for  rate-making 
purposes. 


CHAPTER  IV 
MAKING  AN  APPRAISAL 

General. — An  appraisal  of  utility  property  is  essentially  a 
piece  of  engineering  work,  but  it  involves  qualifications  broader 
than  mere  construction,  more  exacting  than  making  ordinary- 
examinations  and  reports.  The  object  to  be  attained  is  a 
definite,  logical  one — ^namely,  to  ascertain  a  fair  value  at  a  given 
time,  for  particular,  specific  property.  Yet  the  attainment  of 
the  object  sought,  is  at  best  difficult,  and  usually  impossible  of 
exact  precision,  owing  to  the  fact  that  no  two  properties  are 
exactly  alike,  prices  fluctuate,  the  personal  equation  varies, 
property  conditions  are  changing,  the  workmen  are  liable  to  err, 
self- attainment  is  ever  present,  the  object  sought  tends  uncon- 
sciously to  prejudice  the  expert  favorably  or  unfavorably,  and 
diverse  interests  bring  pressure  to  bear  so  that  under  these 
various  influences  the  individual  honestly  endeavoring  to  obtain 
a  just,  final  and  single  figure,  will  probably  find  the  result  differs 
from  that  of  another  expert  equally  honest  and  industrious,  the 
difference  between  them  depending  on  the  dissimilarity  in 
methods,  effort,  experience,  prejudice  and  influence. 

From  an  engineer's  standpoint,  it  would  seem  as  if  the  making 
of  an  appraisal  would  result  in  but  one  set  of  figures,  and  that 
the  engineer  is  not  interested  in  the  purpose  for  which  the  valua- 
tion is  undertaken.  To  a  limited  extent,  this  is  correct,  but  as 
more  fully  explained  in  another  chapter,  value  has  several 
modifications  of  meaning,  and  the  particular  value  as  determined 
by  the  purpose  of  the  appraisal,  must  be  clearly  understood  and 
appreciated  by  the  individual  in  charge  of  making  the  valuation. 
There  can  be  but  one  value,  one  set  of  figures  truly  representing 
original  cost,  reproduction  cost  at  a  given  time,  or  present  worth 
of  property  in  a  given  condition,  but  while  there  is  one  set  of 
figures  for  each  value  there  may  be  several  values. 

There  should  be  no  confusion  of  thought  or  misapprehension 
as  to  the  fact  that  there  is  only  one  legitimate  definite  value  for 
property,  estimated  on  a  given  basis.  Original  cost  for  a  particu- 
lar machine  will  be  always  the  same,  but  its  reproduction  value 
will  vary  from  year  to  year,  depending  on  the  conditions  of  the 
4  49 


50  VALUATION  OF  PUBLIC  UTILITIES 

market,  in  the  same  way  the  present  value  will  depend  upon 
whether  or  not  repairs  and  up-keep  have  been  well  maintained 
or  the  parts  allowed  to  deteriorate  so  that  deferred  maintenance 
is  apparent.  Thus  it  will  be  seen  that  while  the  valuation  of 
property  is  primarily  an  engineering  calculation,  the  value 
finally  sought  will  depend  upon  the  basis  of  the  valuation. 

That  the  particular  value,  as  original  cost,  replacement  cost 
or  present  value,  which  may  be  sought  in  any  given  investigation 
will  not  and  must  not  be  modified  by  the  purpose  for  which  it 
may  be  used  or  the  effect  it  may  produce  goes  without  saying. 
Perhaps  such  statement  is  superfluous,  in  view  of  the  engineer's 
code  of  ethics,  but  the  thought  needs  emphasis  in  view  of  the 
frequent  irreconcilab^'lity  of  engineering  figures,  and  the  too 
prevalent  and  sarcastic  comments  on  the  unreliability  of  all 
expert  opinions. 

The  following  points  have  been  quite  generally  accepted  as 
forming  the  theory  or  basis  on  which  to  proceed  in  making  an 
appraisal: 

(a)  Ascertain,  and  keep  clearly  in  mind  the  particular  value 
to  be  determined  in  order  that  an  intelligent  appreciation  of  the 
end,  and  purpose  of  the  appraisal  may  be  fully  accomplished. 
An  individual  in  charge  of  an  appraisal  cannot  be  looked  upon  as 
a  mere  machine,  and  the  weakness  of  many  valuations  has  been 
due  to  the  fact  that  the  engineer  in  charge  has  been  so  considered. 
He  has  been  instructed  to  ascertain  a  certain  particular  fact,  one 
of  the  several  parts  going  to  make  up  the  complete  answer,  and 
in  consequence,  failing,  perhaps,  to  fully  understand  the  entire 
matter,  or  precluded  from  offering  suggestions  or  advice  which 
in  many  instances  would  be  invaluable,  there  has  resulted  an 
incomplete  solution  of  the  problem  which  always  causes  dissatis- 
faction, and  sometimes  disaster., 

(b)  Thoroughly  appreciate  that  an  appraisal  is  not-  made  for 
the  purpose  of  ascertaining  a  "scrap"  or  "junk"  value  of  the 
property  unless  under  exceptional  conditions,  as  more  fully 
explained  in  the  discussion  of  depreciation.  Valuation  work 
is  usually  for  the  purpose  of  ascertaining  the  worth  of  property, 
either  in  its  service  to  the  public  or  for  purposes  of  sale,  or  taxa- 
tion as  an  operating  entity.  Therefore  the  value  that  physi- 
cal elements  of  the  property  may  have,  separate  and  apart  from 
the  other  elements,  or  for  use  in  some  other  place,  for  a  different 
purpose,  is  not  the  usual  value  desired  when  making  an  appraisal. 


MAKING  AN  APPRAISAL  51 

"The  true  value  of  a  line  of  railroad  is  something  more  than  aggre- 
gation of  the  values  of  the  separate  parts  of  it,  operated  separately. 
It  is  the  aggregate  of  those  values  plus  that  arising  from  a  connected 
operation  of  the  whole,  and  each  part  of  the  road  contributes  not  merely 
the  value  arising  from  its  independent  operation,  but  its  mileage  pro- 
portion of  that  flowing  from  a  continuous  and  connecting  operation  of 
the  whole.  The  value  of  property  results  from  the  use  to  which  it  is 
put,  and  varies  with  the  profitableness  of  that  use,  past,  present  and 
prospective,  actual  and  anticipated.  There  is  no  pecuniary  value  out- 
side that  which  results  from  such  use. 

"  In  the  nature  of  things  it  is  practically  impossible,  at  least  in  respect 
to  railroad  property,  to  divide  its  value  and  determine  how  much  is 
caused  by  one  use  to  which  it  is  put  and  how  much  by  another."  ^ 

(c)  Realize  that  the  final  figures  obtained  as  the  result  of  an 
appraisal  should  be  free  of  all  doubt  as  to  their  reliability,  in 
order  that  their  sponsor  may  be  able,  if  necessary,  to  satisfactor- 
ily stand  cross-examination  in  a  Court  of  law.  Such  figures  can 
only  be  obtained  through  the  application  of  methods  that  are 
eminently  fair,  conservative,  wrought  out  with  an  expenditure 
of  the  necessary  time,  reasonable  care  and  in  sufficient  detail 
to  insure  accuracy  and  correctness.  Aside  from  experience  in 
engineering  work,  the  knowledge  of  Court  procedure,  clear  cut 
conceptions  of  value,  with  a  high  sense  of  fairness,  and  integrity 
will  be  found  helpful  in  preparing  estimates  of  value. 

(d)  Understand  that  throughout  the  progress  of  the  work,  it 
will  be  found  necessary  to  exercise  tact,  judgment,  equipoise 
and  patience,  aside  from  having  the  necessary  qualifications  in 
the  way  of  engineering  experience,  conscientiousness,  persever- 
ance, and  good  common  sense,  so  that  the  final  figures  represent 
the  appraiser's  honest  opinion  of  the  value  of  the  property  under 
local  conditions. 

In  making  appraisals  there  is  a  constant  tendency  to  confuse 
original  cost  with  cost  to  reproduce  new,  at  the  time  of  the  ap- 
praisal. The  extent  to  which  this  error  exists,  even  among 
those  supposed  to  be  authorities,  is  remarkable.  For  example, 
in  some  of  the  decisions  of  the  New  York  Public  Service  Commis- 
sion First  District,  the  cost  to  reproduce  new  or  present  value  of 
machinery,  apparatus  and  buildings,  is  used  in  connection  with 
assessed  value,  or  original  cost  of  real  estate,  to  obtain  what  is 

^  Cleveland,  Cincinnati,  Chicago  and  St.  Louis  Railway  vs.  Backus 
154  U.  S.,  444. 


52  VALUATION  OF  PUBLIC  UTILITIES 

indicated  as  reproduction  cost.  In  a  similar  way,  the  Wisconsin 
Railroad  Commission  ordinarily  estimates  the  deficit  from  opera- 
tion or  cost  of  building  up  the  business  of  a  corporation  during 
the  early  years,  which  amount  it  uses,  in  connection  with  the 
appraised  value  of  the  physical  property  on  the  basis  of  reproduc- 
tion cost,  in  order  to  obtain  the  total  value  of  the  property  in 
question.  As  has  been  suggested  elsewhere  under  "  Going 
Value"  such  procedure  w^ould  seem  illogical,  in  that  the  physical 
property  has  been  valued  on  the  theory  of  the  cost  of  reproduc- 
tion, while  the  capitalized  deficit,  or  going  value,  is  made  up 
from  a  consideration  of  the  past  history  of  the  company,  based 
on  actual  costs,  where  obtainable.  Theoretically  there  is  no 
reason  why  the  cost  of  building  up  the  present  business,  like  the 
value  of  the  physical  plant,  should  not  be  based  on  an  estimated 
cost  of  reproduction.  Original  cost,  cost  of  reproduction,  new 
and  present  values  are  not  synonymous,  and  cannot  be  mingled 
indiscriminately.  All  three  values  are  of  service  in  determining 
the  fair  value  of  property,  but  no  single  one  of  these  three  is  the 
only  fair  value.  The  courts  have  held  that  while  original  cost  is 
of  use  in  determining  fair  value,  it  is  not  the  only  controlling 
factor;  they'  have  indicated  that  cost  of  reproduction,  at  any 
given  time,  shall  be  considered  as  one  of  the  standards  of  value, 
but  they  have  not  suggested  setting  up  a  standard  which  is  a  com- 
bination of  these  two  separate  and  distinct  bases  of  valuation. 

Cost  of  Appraisals. — ^The  expense  of  making  an  appraisal  will 
naturally  depend  on  the  extent  of  the  property,  the  thoroughness 
with  which  the  work  is  to  be  done,  and  to  a  lesser  degree,  upon 
the  time  allowed,  and  the  grade  of  men  employed  on  the  work. 

An  appraisal  to  be  used  for  the  purpose  of  opening  new  ac- 
counts, can  be  made  rather  general  and,  of  course,  would  not  be 
nearly  as  elaborate  and  expensive  as  an  appraisal  to  be  submitted 
to  a  Public  Service  Commission,  as  a  basis  of  fixing  rates.  Prop- 
erty that  represents  a  considerable  investment  and  is  of  a  uniform 
type,  so  that  the  inventory  is  brief,  and  the  unit  prices  few,  can 
be  appraised  at  an  expense  of  not  over  20  to  30  cents  per  thou- 
sand dollars,  of  property  valued.  On  the  other  hand,  where 
there  are  many  structures  of  various  types,  with  expensive  but 
unexposed  foundations,  many  and  varied  elements,  making  the 
compilation  of  the  inventory  and  the  determination  of  the  unit 
prices,  an  arduous  and  time-consuming  task,  the  expense  of 
the  appraisal  work  may  run  up  to  a  dollar  or  more  per  thousand 


MAKING  AN  APPRAISAL  53 

dollars,  of  property  valued;  from  60  to  75  cents  per  thousand 
dollars,  is  usually  considered  a  very  satisfactory  cost  for  the 
appraisal  of  large  lighting,  traction,  and  similar  properties,  but 
considerably  lower  figures  obtain  for  steam  railroad  valuation. 
The  figures  given,  of  course,  do  not  include  any  expenditures  for 
court  proceedings,  arbitrations,  expert  testimony,  or  counsel  fees. 

The  appraisal  of  the  railroads  by  the  Railroad  Commission  of 
Texas  in  1894  and  1895,  covering  8860  miles  and  appraised  at 
$15,844  per  mile,  has  been  estimated  to  have  cost  about  $2  per 
mile.  In  that  case,  the  railroad  companies  furnished  the  ap- 
praisers with  maps,  profiles,  construction  records,  estimates  of 
quantities,  and  such  other  information  as  was  available,  thus 
saving  considerable  expense,  although  inspectors  personally 
examined  the  property,  checking  the  measurements  of  structures 
and  estimating  quantities.  The  Minnesota  State  appraisal  of 
the  steam  roads  cost  8.12  per  mile  of  main  line. 

The  following  has  been  stated  with  regard  to  the  cost  of  the 
valuation  of  the  Michigan  Railroads,  appraised  at  an  average  of 
SI 5,290  per  mile  of  single  track,  exclusive  of  the  non-physical 
elements,  first  made  in  1900,  under  the  direction  of  the  State 
Legislature: 

"No  complete  statement  of  the  total  cost  of  the  work  of  valuation  in 
Michigan  has  ever  been  issued  as  a  public  document.  The  cost  of  the 
work,  including  salaries  of  appraiser,  engineers,  assistants,  clerks,  all 
expenses  of  the  Board  of  Review,  all  expenses  connected  with  Pro- 
fessor Adams'  non-physical  appraisal,  also  all  office  rent,  stationery, 
supplies,  telegraph,  telephone,  and  railroad  expenses,  printing  and 
binding — in  short  every  dollar  chargeable  to  the  Michigan  railroad 
appraisal  of  1900— footed  up  to  $70,60^.21. 

The  exact  mileage  of  roads  in  the  State  was: 

Main  track 7,082.35  miles 

Second  track 164.83  miles 

Branches 730.92  miles 

Spurs  and  sidings 2,904.70  miles 

Total 10,882.80  miles 

Average  cost  per  main-line  mile $9.97 

Average  cost  per  total  track  mile 6.50 

"The  exact  figures  of  cost  of  the  subse<iuent  work  of  appraisal,  or  the 
costs  of  the  litigation,  are  not  available  to  the  writer.  In  a  general 
way,  it  may  be  said  that  the  cost  to  the  State  of  the  railroad  tax  cases 
was  not  far  from  $75,000  and  that  the  expenses  of  the  second  and 
third  appraisals  were  less  than  $50,000,  so"  that,  to  date,  the  entire  cost 


54  VALUATION  OF  PUBLIC  UTILITIES 

to  the  State  of  Michigan  is  less  than  1200,000  for  the  three  appraisals 
and  the  litigation  growing  out  of  them. 

"  Some  information  as  to  details  of  costs  may  not  be  out  of  place. 
All  employees  were  paid  a  salary  and  required  to  provide  their  own 
subsistence.  Salaries  ranged  from  $250  to  $500  per  month  for  experi- 
enced men,  from  $125  to  $250  for  men  with  only  a  few  years  of  experi- 
ence, and  from  $75  to  $125  for  assistants  and  clerks. 

"All  traveling  expenses  (except  hotel  and  subsistence)  were  paid, 
the  State  issuing  mileage  books  to  all  employees,  and  receiving  a  com- 
plete check  on  the  movements  of  every  man  through  the  mileage 
bureau.  The  telegraph  and  long-distance  telephone  were  used  almost 
exclusively  in  communication  between  the  office  and  the  men  in  the 
field,  all  bills  being  paid  by  the  State.  All  expenses  of  inspection  by 
hand-car,  velocipede-car,  etc.,  were  paid  by  the  State,  except  as  the 
roadmasters  made  trips  with  the  inspectors. 

"The  unvarying  pohcy  of  the  appraiser  was  to  reimburse  the  com- 
panies for  all  extra  expenses  incurred  on  account  of  the  work,  and'  to 
accept  no  transportation  or  favors  from  any  company"^ 

Inventory. — Nothing  is  more  important  to  a  trustworthy 
appraisal  than  the  inventory.  In  fact  the  whole  valuation  falls 
if  the  inventory  is  not  complete  and  accurate.  Making  a  proper 
and  reliable  inventory  of  a  large  property,  involves  an  amount  of 
detail  that  will  seem  unduly  laborious  with  an  accompanying 
unwarranted  expense  to  those  inexperienced  in  appraisal  work. 
Ordinarily  it  is  the  difficult  and  expensive  part  of  the  work  and 
will  be  found  to  run  from  50  to  75  per  cent,  of  the  total  cost  of 
making  an  appraisal. 

It  is  very  desirable  to  determine  in  advance  what  separation  of 
the  values  may  ultimately  be  required.  It  is  comparatively  easy 
to  arrange  the  work  at  the  start  so  that  the  value  of  certain  parts 
or  classes  will  be  kept  separate,  and  therefore  conveniently 
available  at  the  conclusion  of  the  work,  whereas  if  such  classifica- 
tion is  not  arranged  in  advance,  it  will  be  found  that  the  em- 
ployees will  group  items  differently,  seeking  only  the  final  figure, 
with  the  result  that,  if  later  the  value  of  certain  items  such  as 
foundations,  services,  labor  of  track  construction,  or  excavation 
for  water-mains  is  sought,  a  large  amount  of  time,  labor  and 
expense  which  would  otherwise  have  been  avoided,  will  be 
incurred  in  going  over  the  detail  sheets  and  picking  out  the  items 
particularly  desired. 

*  The  Valuation  of  Public  Service  Property,  H.  E.  Riggs.  Transactions 
American  Society  of  Civil  Engineers,  Vol.  LXXII. 


MAKING  AN  APPRAISAL  55 

In  order  to  determine  cost  of  reproduction  at  some  future 
date,  unit  prices  proper  for  that  time  must  be  applied  and  if  the 
inventory  is  conveniently  arranged  in  advance,  much  future 
time  and  expense  can  be  saved  when  substituting  the  new  unit 
prices. 

In  order  to  properly  make  an  appraisal  of  any  property,  other 
than  the  most  simple,  there  will  be  at  once  apparent,  the  necessity 
of  intelligently  classifying  the  various  subjects,  at  least  along 
general  lines,  as  to  tangible,  intangible  and  superseded  and 
possibly  non-existent  property.  Then  the  tangible  property 
must  be  divided  into  sub-classes,  for  example,  real  estate, 
buildings,  generating-machinery,  track,  pole  lines,  ducts,  cable, 
rolling  stock,  distributing  mains,  services,  paving,  tools,  supplies, 
furniture,  etc.  Where  the  appraisal  covers  extensive  properties, 
further  sub-division  or  classification  will  be  found  necessary; 
l:)uildings  may  have  to  be  divided  into  frame  structures,  concrete 
or  brick  structures,  vaults,  foundations  and  excavations;  machin- 
ery into  electrical  machinery,  steam  machinery,  gas  generating 
apparatus,  etc. 

The  proper  division  or  classification  of  the  property  to  be 
appraised  will  vary  with  the  different  properties,  depending 
perhaps  on  bookkeeping  convenience  and  certainly  upon  the 
experience  and  ability  of  the  men  doing  the  particular  work  in 
question.  After  the  arrangement  of  the  general  classification, 
detailed  instructions  must  be  such  as  to  insure  including  all  of 
the  property  and  yet  permitting  no  duplication,  e.g.,  the  men 
taking  foundations  of  buildings,  must  clearly  understand  whether 
or  not  their  work  includes  foundations  of  machinery  and  similarly 
the  machinery  men  must  clearly  understand  how  much,  if  any, 
of  the  foundations — sometimes  practically  a  part  of  the  building 
— they  are  expected  to  consider.  The  men  taking  tools  and 
fixtures  will  find  it  necessary  to  frequently  confer  with  the  men 
taking  buildings,  because  the  most  exhaustive  instructions  will 
usually  be  found  inadequate  to  cover  all  fixtures,  some  of  which 
become  a  part  of  the  building. 

Preliminary  to  taking  up  the  inventory  of  property,  it  is  very 
desirable  to  obtain  from  the  owners,  all  maps,  profiles,  plans, 
data,  records,  contracts,  stock-lists  and  other  papers  which  will 
be  of  service  in  preparing,  as  far  as  possible,  a  complete  inventory 
of  the  property  to  be  appraised.  This  preliminary  inventory 
should  be  worked  up  as  fully  as  practicable,  from  the  information 


56  VALUATION  OF  PUBLIC  UTILITIES 

available,  but  without  regard  to  cost  or  prices.  The  work  is 
entirely  office  work,  and  consists  merely  in  preparing  in  advance 
of  field  inspection,  properly  classified  lists  or  records  to  be 
furnished  inspectors  as  memoranda  or  guides  from  which  to 
work  in  checking,  verifying,  adding  or  deducting,  as  may  be 
found  necessary,  after  an  examination  of  the  property  through 
field  inspection.  If  no  records  or  data  are  available,  then  simply 
blanks,  properly  prepared,  should  be  furnished,  to  be  filled  in  by 
the  field  inspectoi's,  but  this  method  of  procedure  usually  requires 
more  experienced  inspectors  and  considerably  longer  time  in 
which  to  complete  the  final  inventory.  The  particular  classifica- 
tion of  inventory  which  may  be  desirable  to  adopt  for  any 
particular  appraisal,  of  course,  depends  upon  the  property  Ijeing 
considered,  capacity  and  experience  of  the  employees,  and  the 
thoroughness  and  detail  with  which  it  is  desired  to  carry  out  the 
work.  Suggestions  as  to  proper  division  and  classification  in, 
appraisals  of  various  properties  will  be  found  in  Chapters  IX 
and  X,  where  forms  used  in  actual  appraisals  have  been  repro- 
duced. It  is  usually  advisable  to  follow  some  standard  form  of 
classification,  such  as  that  set  out  in  the  "Methods  of  Uniform 
Accounting"  issued  by  the  Public  Service  Commissions  of  some 
States,  or  the  forms  adopted  by  some  of  the  National  Organiza- 
tions of  operators  of  public  utilities  or  those  suggested  by  the 
Interstate  Commerce  Commission. 

Where  corporations  have  diverted  surplus  earnings  into  the 
improvement  of  the  property,  receiving  at  the  same  time  a  fair 
rate  of  return  on  the  investment,  it  has  been  held  in  some  cases 
that  the  investment  thus  made  should  not  be  capitalized  or 
recognized  in  valuations  for  certain  purposes.  In  New  York 
State  the  Commissions  were  originally  authorized  to  permit  the 
issuance  of  securities  for  only  four  purposes:  (a)  acquisition  of 
property;  (b)  construction,  completion,  extension,  and  improve- 
ment of  facilities;  (c)  improvement  or  maintenance  of  service; 
(d)  discharge  or  lawful  fund  of  obligations.  This  meant  in  effect, 
that  where  the  earnings  of  a  corporation  have  been  invested  in 
fixed  assets,  it  could  not  later  obtain  the  consent  of  the  Com- 
missions to  reimburse  its  treasury  on  account  of  such  expendi- 
tures, thus  largely  effecting  the  relation  between  surplus  and 
capital.  The  present  law  of  Massachusetts  prohibits  the  cap- 
italization of  surplus  earnings  and  a  recent  decision  of  the 
Massachusetts  Gas  and  Electric  Commission,  with  regard  to  the 


MAKING  AN  APPRAISAL  57 

Worcester  Gas  and  Electric  Company,  held  that  surplus  earn- 
ings expended  for  improvements  and  capitalized  should  not  be 
recognized  as  property  to  be  included  in  the  valuation  for  the 
purposes  of  that  case.  The  instances  cited  indicate  the  necessity 
for  a  knowledge  of  all  attending  circumstances,  when  undertaking 
a  valuation,  in  order  to  determine  the  proper  basis  upon  which 
to  make  up  the  inventory. 

The  proper  perspective  is  necessary  to  the  making  of  a  correct 
inventory.  It  must  be  not  alone  absolutely  full  and  complete, 
but  also  in  sufficient  detail  to  permit  intelligently  ascribing  fair 
unit  prices  to  the  various  parts  of  the  property.  Listing  of 
minutia  such  as  each  tube  in  a  boiler,  each  coil  in  a  transformer 
or  each  bolt  in  car  body  would  result  only  in  needless  expense  and 
an  accuracy,  in  the  complete  appraisal,  that  would  be  no  more 
satisfactory  than  if  a  classification  of  units  had  been  adopted  to 
which  proper  prices  for  the  article  taken  as  a  whole  could  be 
applied,  e.g.,  the  type  of  boiler  as  a  whole,  the  particular  trans- 
former complete,  the  whole  car  body  ready  for  mounting.  Varia  - 
tions  from  the  standard  adopted,  with  additions  or  omissions, 
must  be  noted,  without  too  great  detail,  but  sufficiently  precise 
to  permit  accurate  classification  and  pricing. 

Even  after  the  most  careful  work  in  preparation  of  an  honest 
inventory,  errors  and  omissions  are  bound  to  occur,  for  which 
compensation  is  usually  made,  under  the  head  of  "  Contingen- 
cies" or  "Omissions,"  by  an  allowance  of  a  proper  percentage, 
added  to  the  total  net  cost.  This  percentage  will  vary  in  amount 
for  different  conditions,  depending  partly  on  the  facilities  offered, 
as  access  to  corporation  records,  freedom  for  inspection,  time 
allowed  and  care  taken  in  preparation  of  the  inventory,  etc. 
Five  per  cent,  ordinarily  is  not  an  unfair  addition  to  the  total 
net  cost  of  the  physical  property  to  add  to  cover  omissions  and 
errors  in  inventory  and  pricing  thereof  and  is  quite  frequently 
used.  Both  larger  and  smaller  allowances,  than  five  per  cent., 
have  been  made  by  recognized  authorities. 

Field  Inspection. — ^Although  the  men  selected  as  field  inspectors 
need  not  necessarily  have  had  broad  experience,  they  should  be 
of  unquestioned  honesty,  observant  and  capable  of  testifying  in 
case  of  necessity,  as  to  the  identity  and  accuracy  of  their  work. 

It  is  advisable  to  have  inspectors  work  in  groups  of  two  or 
more,  as  they  tend  to  check  one  another,  and  the  work  will 
usually  advance  more  rapidly  than  if  the  men  work  singly.   Fur- 


58  VALUATION  OF  PUBLIC  UTILITIES 

nished  with  blanks,  or  the  preliminary  inventory  prepared  in 
advance  in  the  office,  and  equipped  with  note  books,  such  instru- 
ments as  may  be  required,  and  full  and  explicit  directions  under 
which  they  are  to  carry  out  the  work,  the  inspectors  are  expected 
to  check  up  all  physical  property,  by  a  careful  personal  inspec- 
tion, making  full  notes,  descriptive  of  all  property,  with  variations 
from  the  inventory,  if  furnished,  noting  particularly  any  peculiar 
conditions  of  installation  which  might  affect  cost,  and  adding 
any  personal  observations  that  may  appear  of  value. 

It  is  usually  desirable  to  have  the  inspectors  also  note  the  exist- 
ing condition  of  property,  as  to  operating  efficiency,  state  of  main- 
tenance or  repair.  The  condition  of  property  is  usually  indicated 
in  the  inspectors'  reports  by  letters,  for  example:  A,  excellent; 
B,  fair;  C,  poor;  D,  scrap;  as  has  been  used  in  appraisal  work 
done  by  some  of  the  Public  Service  Commissions.  Another  widely 
used  method  is  to  indicate  the  condition  by  a  percentage,  based 
on  a  comparison  with  new  apparatus  which  is  taken  as  100  per 
cent.  This  method  was  used,  for  example,  in  the  State  apprai- 
sals of  the  Michigan  and  the  Wisconsin  Railroads. 

It  is  quite  customary  and  usually  preferable  to  limit  the  work 
of  the  inspectors  to  checking  and  describing  the  physical  dimen- 
sions and  conditions  of  the  property,  leaving  all  pricing  to  be 
done  at  a  later  time  in  the  office,  either  b}'  the  inspectors  or  other 
computers,  under  the  direction  of  more  experienced  men,  particu- 
larly qualified  for  this  part  of  the  work,  which  requires  extreme 
care. 

As  inspectors'  reports  are  turned  in,  they  should  be  studied  and 
analyzed,  preparatory  to  applying  the  unit  prices.  This  study  may 
disclose  contradictions  or  omissions,  making  a  re-inspection 
necessary,  or  in  certain  instances,  a  second  examination  by  other 
inspectors  is  advisable  in  order  to  check  the  fairness  or  honesty 
of  some  employees,  or  to  verify  the  accuracy  of  the  work  being 
done. 

Emphasis  should  be  laid  on  the  importance  and  necessity 
of  having  the  inspectors  make  explicit  notes  and  reports  in 
proper  books,  or  on  forms  which  at  any  future  time  may  be  iden- 
tified for  each  inspector.  These  field  notes  and  reports  should  be 
properly  indexed  and  safely  filed  away  for  convenient  reference 
and  identification,  in  case  of  future  necessity,  as  the  courts  have 
held  that  the  attorneys  of  either  side  have  the  right  to  call  for 
the  production  of  subordinates,  with  their  notes  and  data,  who 


MAKING  AN  APPRAISAL  59 

have  been  used  in  the  preparation  of  the  figures  of  a  valuation  on 
which  a  decision  is  to  be  based.  Consequently,  the  importance 
will  be  recognized,  not  only  of  having  men  engaged  on  the  apprai- 
sal who  are  reliable  and  trustworthy,  but  also  of  having  available 
their  notes  and  data  from  which  they  may  refresh  their  memory; 
otherwise  the  entire  appraisal  may  be  thrown  out  as  worthless. 

Suggested  Procedure. — A  valuation  to  be  complete  in  the  full- 
est sense,  must  take  into  consideration  not  alone  the  original 
cost,  present  value,  or  cost  of  reproduction  of  the  physical  plant 
but  also  the  intangible  and  non-physical  values,  the  limitations 
of  franchise,  as  well  as  the  market  quotation  of  securities.  To 
complete  a  valuation  of  such  broad  scope,  the  following  method 
of  procedure  is  suggested: 

(a)  Obtain  from  the  proper  officials  of  the  Company,  data, 
drawings  and  specifications  covering  original  construction  as. 
well  as  later  additions,  also  lists  of  material  and  supplies,  and  if 
available,  a  complete  inventory  of  all  existing  physical  property. 
Where  inventories  are  incomplete,  as  is  usually  the  case,  they 
must  be  completed  by  field  inspection  and  in  every  case  verified 
and  checked.  How  thoroughly  and  with  what  detail  inspection 
may  be  necessary,  depends  on  the  thoroughness  of  the  appraisal 
being  made.  For  example,  test  holes  may  have  to  be  sunk  in 
order  to  verify  information  as  to  excavation,  foundations,  buried 
pipes,  duct  lines,  or  other  sub-surface  structures.  The  size, 
quantity  and  condition  of  all  physical  property,  must  be 
determined. 

(b)  Obtain  available  data  as  to  costs  and  prices,  by  examina- 
tion of  corporation  vouchers,  not  only  for  the  period  in  which 
the  appraisal  is  being  made,  but  covering  also  original  cost. 
Classify  the  cost  of  different  materials  and  labor,  in  accordance 
with  that  method  which  will  enable  a  convenient  and  easy 
comparison  for  the  appraisal  work  in  hand.  Particular  attention 
should  be  given  to  expenditures  during  the  early  history  of  the 
Company  covering  items  that  may  properly  be  qualified  as 
"Development  Expenses"  such  as  interest,  taxes  and  similar 
expenses  during  construction,  checking  the  cost  as  ascertained 
from  vouchers,  with  the  book  cost.  The  two  are  not  likely  to 
agree,  due  to  destruction  of  old  records,  accidentallj^  or  other- 
wise, and  the  fact  that  expenditures  may  have  been  made  and 
no  vouchers  received  therefor. 

(c)  Examine  the  record  books  of  the  corporation,  ascertaining 


60  VALUATION  OF  PUBLIC  UTILITIES 

therefrom  all  information  as  to  the  issuance  of  stocks,  bonds,  or 
other  forms  of  indebtedness,  the  cash  received  therefrom, 
records  of  transactions  of  the  officials  in  authorizing  contracts, 
and  the  prices  thereof. 

(d)  A  personal  inspection  and  examination  must  be  made  as 
a  physical  property,  by  the  individual  in  charge  of  the  appraisal 
work,  and  a  more  or  less  detailed  acquaintance  had  with  the 
plant,  and  the  conditions  under  which  it  is  operating,  even 
though  the  working  out  of  detailed  information  is  left  to  one's 
subordinates. 

(e)  Determine  the  unit  prices  to  be  used,  and  the  percentages 
to  be  allowed  in  connection  therewith,  the  fixing  of  unit  prices 
and  percentages  to  be  added  depends  upon  the  basis  adopted 
for  the  prices  themselves. 

(f )  Using  the  completed  inventory,  the  unit  prices  determined 
upon  are  to  be  applied,  and  the  work  carefully  checked,  to  avoid 
errors.  Two  inventories,  and  two  sets  of  unit  prices  may  be 
necessary,  if  both  the  original  cost,  and  the  cost  of  reproduction 
is  being  determined.  To  the  totals  obtained  from  applying  the 
unit  prices  to  the  inventory,  should  be  added  the  percentages  for 
engineering,  contingencies,  and  administration  or  superintendence 
during  construction,  etc.,  in  order  to  obtain  the  cost  of  the 
physical  plant. 

(g)  If  the  depreciated  or  present  value  is  desired,  the  amount 
of  depreciation  must  be  determined  in  accordance  with  the 
principles  laid  down  in  the  chapter  on  "Depreciation"  and  this 
sum  deducted  from  the  cost,  giving  the  present  value  of  the 
physical  plant. 

(h)  Investigate  the  actual  operating  conditions,  method  of 
serving  the  public,  rates  charged,  system  of  providing  for  depreci- 
ation, and  maintanance  of  the  property. 

(i)  Ascertain  the  limiting  conditions,  in  the  Articles  of  In- 
corporation, charters,  franchises,  municipal  contracts,  or  other 
governing  obligations,  determine  whether  local  conditions  are 
such  as  to  promise  fair  treatment  and  a  bright  future  for  the 
corporation,  or  whether  its  business  is  likely  to  be  interfered 
with,  either  through  competition  or  popular  opposition. 

(j)  Development  expenses  are  determined  from  a  considera- 
tion of  the  time  necessarily  consumed  in  building  the  plant 
under  consideration,  the  rate  of  interest,  taxes  and  other  such 


MAKING  AN  APPRAISAL 


61 


expenses,  with  proper  allowance  for  remuneration  to  the  original 
promoters  of  the  enterjirise. 

(k)  Consideration  should  be  had  as  to  whether  good  will, 
franchise  or  going  value  should  be  allowed  for,  and  if  so,  the 
amount  may  be  determined  from  a  consideration  of  the  matters 
set  forth  in  another  chapter. 

(1)  The  sum  of  the  phj'sical  plant  value  plus  the  develop- 
ment expenses,  plus  the  value  of  franchise,  good  will,  going 
value,  or  contracts,  if  any,  will  result  in  a  sum  representing  one 
fair  value. 

The  items  to  be  determined  in  making  a  valuation  to  ascer- 
tain the  total  fair  value  of  a  utility  property  may  be  diagram- 
maticallv  summarized  as  follows: 


Net   cost    of   physical 
plant. 


Contractor's  profit. 

Engineering, 
Contingencies,  etc. 


Expenses  preliminary  to 
beginning  plant  con- 
struction. 

Overhead  expenses  dur- 
ing construction. 


Working  capital. 
Superseded  plant. 
Franchises. 
Good  will. 
Going  value. 
Contracts. 


Structural  value. 


Development  expenses. 


Total  value. 


Intangible  value. 


CHAPTER  V 
STRUCTURAL  COSTS 

Unit  Prices. — Determination  of  the  proper  prices  to  emplo}^  in 
valuation  work  is,  usually,  not  a  very  complicated  matter.  If 
there  is  a  common  purpose  to  be  fair  and  base  prices  on  facts, 
different  engineers  will  be  found  to  agree  reasonably  closely. 
The  chief  differences  are  apt  to  be  due  to  lack  of  authoritative 
quotations  and  difference  of  opinion  regarding  proper  allowances 
for  changed  conditions  as  between  original  and  present  costs. 

The  first  thing  to  be  decided  is  the  unit  prices  to  be  affixed  to ' 
the  completed  inventories.  To  intelligently  fix  a  fair  unit  price, 
it  will  be  necessary,  where  possible,  to  examine  bills,  vouchers, 
contracts,  minute  books  and  other  records  of  the  corporation, 
as  well  as  to  investigate  local  market  conditions,  both  as  to  labor 
and  material  and  obtain  quotations  direct  from  manufacturers. 
Every  engineer,  from  the  inspectors  up,  will  be  able,  from  his  own 
experience,  and  data  accumulated  from  previous  work,  and  from 
the  knowledge  gained  while  making  inspections  of  the  property 
under  consideration,  to  furnish  information  and  suggestions  that 
will  conduce  to  the  general  fund  of  information  which,  drawn 
from  many  and  varied  sources,  must  be  made  the  basis  from 
which  the  final  unit  prices  are  worked  up. 

On  the  man  in  general  charge  of  the  appraisal  rests  the  respon- 
sibility of  harmonizing  the  unit  prices  fixed  by  his  several  assist- 
ants, whose  experience  and  viewpoint,  being  different,  may  come 
to  different  conclusions  for  the  cost  of  doing  the  same  or  similar 
work,  e.g.,  excavation  for  buildings,  track-laying,  building 
foundations,  installing  ducts,  laying  pipe.  Nothing  is  easier, 
in  discrediting  an  appraisal,  than  to  show  in  ''deadly  paral- 
lel," unit  prices,  some  of  which,  if  correct  for  one  piece  of  work, 
prove  that  the  other  prices  used  for  similar  work  are  absurd  and 
incongruous.  The  importance  of  this  harmony  shows  again  the 
necessity  for  co-operation  and  frequent  conferences  betw^een  the 
appraisal  experts.  A  general  smattering  knowledge  or  a  tendency 
to   deal   in  glittering   generalities,   does  not  qualify  a  man  for 

62 


STRUCTURAL  COSTS  63 

establishing  fair  prices.  Without  patient,  painstaking  effort, 
supported  by  experience  and  practical  knowledge  as  to  current 
market  prices,  the  reliable  framing  of  unit  prices  is  an  impossi- 
bility with  consequent  reflection  on  the  entire  results. 

The  making  up  of  unit  prices  in  any  specific  case  will  depend 
upon: 

(a)  The  local  conditions,  as  for  example,  character  of  soil  in 
which  the  excavation  is  to  be  made,  accessibility  for  the  delivery 
of  parts  shipped  in,  conditions  of  the  local  labor  market,  both  as 
to  quality  and  supply,  and  similar  local  characteristics. 

(b)  The  source  and  character  of  the  information  on  which  the 
figures  making  up  the  unit  prices  are  based.  The  information 
will  vary  from  mere  hearsay  to  exact  figures  obtained  for  similar 
work  under  similar  conditions,  and  the  dependence  to  be 
placed  on  the  source  of  information  must  be  duly  considered 
and  weighed. 

(c)  The  refinement  to  be  used  in  making  up  unit  prices.  In 
some  cases  an  average  figure,  based  on  proper  experience  and 
judgment,  may  prove  as  satisfactory  as  a  figure  laboriously 
worked  out  from  a  mass  of  varying  data.  There  is  always 
opportunity  for  abbreviating  the  work  by  due  consideration  of 
this  matter  by  a  competent  expert. 

(d)  The  relation  of  the  unit  price  to  the  percentages  to  be 
added  later. 

(e)  Whether  or  not  depreciation  is  to  be  allowed  in  the  unit 
price. 

(f)  Whether  the  unit  price  applies  to  the  raw  material  or  the 
finished  product.  For  example,  the  purchase  of  a  given  number 
of  yards  of  sand,  concrete  and  stone  results  in  the  production 
of  a  yardage  of  concrete  quite  different  from  the  sum  of  the 
yards  of  the  three  constituents. 

(g)  Whether  the  unit  price  includes  the  cost  of  the  labor, 
material,  supervision,  administration  expense,  and  incidentals 
or  whether  these  items  are  to  be  kept  separate. 

In  order  to  obtain  a  total  fair  value  of  property,  it  is  of  course 
essential  to  apply  fair  unit  prices  to  the  elements  contained  in 
the  completed  inventory.  Two  unit  prices,  both  fair,  and  yet 
quite  different  in  value,  might  be  used;  one,  the  higher,  would 
include  certain  allowances  which  the  other  would  not  include, 
because  added  later  as  a  percentage  of  the  total  net  cost.  As 
will  be  seen,  the  first  method  endeavors  to  fix  the  total  cost,  to 


64  VALUATION  OF  PUBLIC  UTILITIES 

the  corporation,  of  the  item  being  considered,  completely  installed, 
including  all  allowances,  but  the  second  and  more  careful  method, 
one  which  is  now  much  in  vogue,  endeavors  to  ascertain  the 
exact  price  paid  for  each  item  bought  separately,  then  to  add 
to  the  net  valuation,  obtained  by  applying  such  unit  prices  to 
the  inventory,  definite  percentages  to  cover  first,  an  allowance 
that  would  have  to  be  paid  a  general  contractor  for  doing  the 
work  of  assembling  and  unifying  the  elemental  parts,  and 
second,  an  allowance  to  cover  engineering,  administration 
expenses,  contingencies  and  omissions. 

The  practice  varies  somewhat,  but  a  quite  general  basis  of 
fixing  unit  prices,  being  the  method  used  and  recommended  by 
the  author,  is  to  determine  from  a  knowledge  of  local  conditions, 
the  fair  prices  for: 

(a)  ''Raw  Materials,"  so-called,  as  sand,  cement,  brick,  rails, 
copper  wire,  pipe,  lumber,  including  also  complete  elements  such 
as  transformers,  meters,  car  bodies,  boilers,  pumps,  engines,  gas 
or  electric  apparatus,  etc.,  delivered  f.  o.  b.  destination. 

(b)  Common,  skilled  and  expert  labor,  both  under  normal 
demands  and  in  case  large  pieces  of  construction  work  were 
undertaken. 

(c)  Small  contractors,  or  "sub-contractors"  services,  i.e.,  the 
price  a  small  contractor  would  charge  for  a  single  piece  of  work, 
for  example,  digging  trenches  for  gas  mains,  track  laying,  con- 
crete in  place  per  yard,  brick  work  complete,  etc. 

From  such  information,  it  is  practicable  to  establish  fair  unit 
prices  for  machinery  apparatus  and  construction  work,  on  the 
basis  of  cost  to  a  corporation,  or  a  general  contractor,  that  is, 
on  what  has  been  termed  "sub-contractor's  basis." 

Contractor's  Profit. — ^The  unit  price  made  up  on  the  "sub- 
contractor's basis"  includes  what  may  be  fairly  considered  as 
only  a  manufacturers'  profit  for  the  production  of  the  several 
elements  which  must  be  assembled  into  a  harmonious,  operating 
whole  by  some  entrepreneur,  for  whose  services  and  direct  ex- 
penses, an  allowance  of  10  per  cent.,  called  "contractor's  profit" 
is  quite  generally  recognized  as  a  fair  and  proper  allowance. 
Where  no  such  percentage  is  shown  in  valuation  tabulations,  it 
will  usually  be  found  that  the  unit  prices  allowed  are  enough 
higher  to  include  the  contractor's  percentage.  The  items  of 
contractor's  profit,  as  well  as  engineering,  incidental?  and  etc., 
if  not  included  in  the  unit  prices  applied  to  the  inventory  to  ob- 


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STRUCTURAL  COSTS  65 

tain  the  cost  of  the  physical  property,  may  be  added  as  a  per- 
centage, after  the  net  value  of  the  structures  is  obtained  as  above 
explained,  or  they  may  be  grouped  with  non-physical  values,  but 
they  are  always  included  in  one  place  or  the  other  in  every  fair 
valuation,  though  perhaps  not  at  first  apparent.  Except  in  the 
rarest  cases,  work  will  not  be  performed  on  the  materials  fur- 
nished without  a  profit  to  the  contractor,  and  though  unit  prices 
may  be  made  up  on  the  basis  of  contractor's  bids  or  contracts, 
without  any  added  allowance  for  profit  or  contingencies,  said 
bids  or  contracts  have,  of  course,  been  made  by  the  contractor 
to  include  a  profit  and  necessary  allowance  for  incidentals  and 
contingencies.  The  percentage  for  contractor's  profit  is  based 
on  the  cost  of  such  labor,  material  and  apparatus  as  is  ordinarily 
contained  in  the  inventory  of  the  physical  plant,  aside  from  real 
estate,  rights  of  way,  material  and  supplies  or  other  property 
purchased  more  advantageously  by  the  corporation  direct. 

From  experience,  it  has  usually  been  found  that  it  is  as  cheap 
or  cheaper  for  a  corporation  to  employ  a  general  contractor  to 
take  charge  of  and  direct  any  large  piece  of  work,  than  to  itself 
undertake  to  carry  out  the  work.  The  reason  for  this  is  that 
working  to  definite  plans  and  specifications,  fitted  by  special 
experience  for  construction  work,  concentrating  all  effort  and 
energy  to  a  single  purpose,  a  capable  contractor  can  do  the  work 
more  efficiently  than  the  corporation,  which  is  primarily  equipped 
for  operation  and  not  for  construction. 

The  percentage  allowance  of  10  per  cent,  is  based  upon  the 
charge  which  has  been  frequently  made  by  responsible  contractors 
who  undertook  the  work  for  the  owner  at  the  latter's  risk. 
When  the  contractor  assumes  the  risk,  he  will  usually  figure  on 
from  20  per  cent,  to  50  per  cent,  additional  to  the  estimated 
sub-contract  cost  depending  on  definiteness  of  contract  and 
specifications,  keenness  of  competition,  contingency  of  accident 
or  unfavorable  conditions  and  size  of  contract  or  liability  involved. 

But  such  large  percentages  may  be  taken  to  cover  omissions 
and  contingencies  which,  in  appraisal  work,  are  provided  for  in 
separate  and  distinct  allowance.  Where  a  contractor  can  do 
work  without  stipulation  and  limitation  as  to  its  cost,  that  is,  on 
the  basis  of  ''labor  and  material,"  he  is  usually  willing  to  furnish 
his  time  and  direct  expenses  for  10  per  cent,  on  the  cost. 

Fluctuating  Prices. — ^^Vhile  current  prices  are  the  basis  of  the 
cost  of  reproduction,  there  are  conditions  where  strict  adherence 

5 


66 


VALUATION  OF  PUBLIC  UTILITIES 


to  such  a  rule  would  result  in  manifest  unfairness  to  the  corpo- 
ration, if  lower,  and  to  the  public,  if  higher  than  average  or 
original  cost  prices.  It  is  a  well  recognized  fact,  that  the  market 
prices  of  iron,  steel,  copper,  pipe,  cement  and  to  some  extent 
labor  fluctuates,  widely,  and  sometimes  artificially  so  that  it  has 
been  recognized  as  legitimate  and  just,  in  valuation  work,  to  use 
market  prices,  averaged  for  a  period  of  five  years,  preceding  the 
date  of  appraisal. 


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July 
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Jan. 

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July 

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Jan.    _   July 

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Jan. 

1908 


July 
1908 


Jan. 

1909 


July 
1909 


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Jan. 

July 

Jan. 

July 

Jan. 

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1905 

1905 

1906 

1906 

1907 

1907 

190S 

1908 

1909 

1909 

Fig.  2. 

On  the  accompanying  insert  page  are  given  curves  showing  the 
fluctuations  in  prices  of  cast  iron  pipe  and  certain  metals  during 
the  past  13  years,  and  also  Portland  cement  prices  for  31  j^ears 
to  date.  The  wide  fluctuations  in  the  price  of  copper,  the  uni- 
form price  of  steel  rails,  since  the  control  of  prices  by  the  steel 


STRUCTURAL  COSTS  67 

corporation,  and  the  gradual  reduction  in  the  price  of  cement, 
are  noteworthy  and  interesting.  As  indicating  the  method  of 
ascertaining  average  prices,  the  data  used  by  tiie  author  in  de- 
termining a  fair  average  price  for  insulated  lead-covered  cables 
for  use  in  an  appraisal  made  in  1909,  are  shown  in  Fig.  2.  The 
prices  actually  paid,  for  the  particular  class  of  cable  indicated, 
by  a  number  of  different  corporations  in  New  York  City,  were 
first  averaged  for  each,  usually  the  result  being  plotted,  as  of 
January,  in  each  year.  Then  the  average  of  the  total  was 
obtained  from  a  consideration  of  prices,  regardless  of  the 
quantities  of  cable  purchased,  as  indicated  by  the  straight  line. 

From  a  study  of  these  curves,  it  will  be  seen  that  great  injustice 
may  be  done  by  taking  the  momentarily  low  price  of  an  article, 
which  fluctuates  widely.  Even  averaging  the  price  for  a  five 
year  period  does  not  always  result  in  strict  justice  to  either  the 
corporation  or  the  public.  For  example,  the  price  of  copper 
varied  from  a  minimum  of  11.5  cents  per  pound  in  1902  to  a 
maximum  of  25.1  per  pound  in  1907.  If  an  appraisal  were  taken 
during  the  year  1908,  when  the  price  was  under  16  cents  per 
pound,  injustice  would  be  done  the  corporation  if  it  had  purchased 
a  large  amount  of  copper  in  the  early  part  of  1907  at  the  prices 
then  existing.  Similarly,  the  use  of  the  prices  of  1907,  in  the 
appraisal  of  corporation  copper  which  had  been  purchased  in 
1904  and  1905,  would  be  unfair  to  the  pul:»Iic.  Valuing  cable 
which  cost  over  $1.50  in  1907,  at  99.5  cents,  is  to  an  extent  un- 
fair to  the  corporation.  On  the  other  hand,  if  purchased  for 
less  than  80  cents  in  1908  the  price  of  99.5  is  unfair  to  the  public 
so  that  only  reasonable  justice  can  be  expected  or  meted  out 
by  using  the  average  prices. 

Engineering  Contingencies,  Omissions,  Etc. — It  has  become  an 
accepted  rule,  in  valuation  work,  to  add  a  general  percentage  to 
the  "  general  contractor's  cost "  or  the  "  base  cost "  of  the  physical 
property,  to  cover  the  exj^ense  of  engineers'  or  architects'  fees, 
contingencies,  incidentals,  omissions  of  inventory,  errors,  city 
inspection,  administration  and  legal  expenses  during  construc- 
tion, with  other  similar  items.  The  percentage  allowed  may  vary 
between  wide  limits,  from  a  minimum  of  8  per  cent.,  customarily 
used  by  the  Wisconsin  Commission  to  cover  all  of  these  items  to 
as  high  as  10  per  cent,  for  contingencies  and  incomplete  inven- 
tories alone,  allowed  in  the  State  valuation  of  the  Michigan 
Railroads.     For  engineering  and  architects'  fees,  5  per  cent,  is 


68  VALUATION  OF  PUBLIC  UTILITIES 

by  far  the  more  usual  allowance,  and  if  applied  to  all  the  physical 
plant,  aside  from  real  estate  and  supplies,  is  fair  and  reasonable. 
It  is  quite  customary,  and  usually  necessary,  both  for  individ- 
uals and  corporations  where  doing  construction  for  private  use, 
or  public  service,  to  employ  engineers  and  architects.  The 
charge  for  such  services  rendered  is  usually  based  on  the  cost  of 
the  work  which  is  supervised.  The  architects'  charges  have  been 
more  or  less  of  a  standard  for  the  other  professions,  so  that  the 
following  extract  from  the  ''Schedule  of  Charges"  recently 
adopted  by  the.  New  York  "Local  Chapter"  of  the  American 
Institute  of  Architects,  is  an  interesting  guide  as  to  such  charges: 

1.  The  Architect's  professional  services  consist  of  the  necessary  con- 
ferences, the  preparation  of  preliminary  studies,  working  drawings, 
specifications,  large  scale  and  full  size  detail  drawings,  and  of  the  gen- 
eral direction  and  supervision  of  the  work,  for  which,  except  as  herein- 
after mentioned,  the  minimum  charge,  based  upon  the  total  cost  of  the 
work  complete,  as  estabhshed  by  the  American  Institute  of  Architects, 

1908,  is 6  per  cent. 

2    Residential  work: 

Private  dwellings  within   the   limits   of   the   city  of 
New  York, 

On  the  first  $50,000  of  cost 8  per  cent. 

On  the  balance  of  cost,  the  minimum  fee  of 6  per  cent. 

Private  dwellings  outside  of  the  city  of  New  York,  in- 
cluding stable  and  other  dependencies. 

On  the  first  $50,000  of  cost 10  per  cent. 

On  the  balance  of  cost 8  per  cent. 

(The  graduated  commission  applies  only  to  the  above 
two  classes  of  residential  work.) 

3.  Monumental,  decorative  and  landscape  work,  special 

interior  and  cabinet  work,  alterations  to  existing 
buildings,  in  all  cases  whether  in  connection  with  fed- 
eral, municipal,  or  other  work 10  per  cent. 

4.  Designs  for  fabrics,  furniture  and  fixtures,  lighting  fix- 

tures, and  special  decorative  work 15  per  cent. 

5.  Articles  not  designed  by  the  architect,  but  purchased 

under  his  direction 6  per  cent. 

The  engineers,  whether  electrical,  mechanical  or  civil,  have 
usually  charged  5  per  cent,  for  entire  supervision  similar  to  the 
architects,  although  they  have  not  held  too  uniformly  to  this 
rate  as  they  are  not  bound  together  by  jDrecedent  and  organi- 


STRUCTURAL  COSTS  69 

zation  as  strongly  and  historicalh'  as  are  the  architects,  so  that 
even  10  per  cent,  or  12  per  cent,  is  sometimes  charged. 

Where  organizations  have  kept  an  exact  record  of  the  cost 
of  doing  their  own  engineering,  it  has  been  found  that  such 
cost  will  not  usually  amount  to  much  less  than  5  per  cent, 
on  the  cost  of  the  property  engineered.  Except  with  respect 
to  very  large  investments  and  investments  of  certain  character, 
such  as  subways  or  complicated  constructions,  the  percentage 
may  run  considerably  above  5  per  cent,  as  evidenced  by  the 
following : 

"The  engineering  cost  of  the  Rapid  Transit  Commission  (New  York 
City),  from  June  1,  1900,  to  July  1,  1907,  was  6  per  cent.  The  engineer- 
ing cost  of  the  Pennsylvania  Railroad  for  its  tunnels  (under  the  Hudson 
and  East  Rivers  and  the  Island  of  Manhattan)  was  5.8  per  cent.;  of  the 
Boston  subway,  9.9  per  cent.;  the  Boston  tunnel  and  subway,  9.17 
per  cent.;  and  the  East  Boston  tunnel,  6.17  per  cent.;  the  engineering 
cost  of  the  Center  Street  subway,  practically  completed  under  the 
Pubhe  Service  Commission  (New  York  City),  was  6  per  cent.;  the 
present  engineering  cost  to  date  of  the  4th  Avenue  subway,  not  yet 
completed,  is  7.8  per  cent.,  and  the  evidence  shows  the  total  charge 
will  run  down  to  at  least  6  per  cent. 

"The  expense  of  making  the  Tri-Borough  plans  was  $4.54,823.47, 
and  upon  a  basis  of  a  cost  to  construct  said  subway  of  $120,000,000,  the 
engineering  expense  would  be  0.37  per  cent.  The  engineering  cost  of 
preparing  the  plans  of  the  Pennsylvania  tunnels  was  0.7  per  cent." 

(It  should  be  noted  that  the  last  two  items  of  expense  given 
do  not  cover  the  whole  engineering  expense  involved.) 

******* 

"  My  own  conclusion  is  that  the  engineering  expense  of  the  Commission 
has  been  reasonable  and  if  the  great  number  of  new  subways  which  the 
city  needs  are  to  be  constructed  under  the  jurisdiction  of  the  Public 
Service  Commission,  the  people  of  the  City  of  New  York  must  expect 
that  the  engineering  cost  will  run  about  6  per  cent,  as  in  the  past."* 

The  Railroad  Commission  of  Wisconsin  allows  5  per  cent,  to 
cover  engineering,  based  on  the  cost  of  all  physical  property, 
except  stores  and  supplies,  whether  for  gas,  electric,  railway, 
telephone  or  water-works  corporations.  The  Public  Service 
Commission,  First  District  of  New  York,  has  been  accustomed 
to    allow    5   per    cent,  for   engineering,    and   a  total  of   15    per 

1  Report  dated  May  31,  1911,  to  Gov.  John  A.  Dix  by  John  X.  Carlisle, 
page  6. 


70  VALUATION  OF  PUBLIC  UTILITIES 

cent,  to  cover  all  the  items,  engineering,  omissions,  adminis- 
tration, etc.,  which  is  added  to  the  cost  of  physical  property, 
except  real  estate,  rolling  stock  and  stores  and  supplies.  The 
Traction  Valuation  Commission  of  Chicago  similarly  allowed  5 
per  cent,  for  engineering,  and  on  most  property  a  total  of  15  per 
cent,  for  engineering,  incidentals  and  organization,  except  on 
rolling  stock,  tools,  supplies  and  real  estate.  The  St.  Louis 
Public  Service  Commission  allows  5  per  cent,  for  engineering  on 
all  items  of  construction,  except  real  estate.  In  the  Consolidated 
Gas  case  the  Master  allowed  10  per  cent,  for  "engineering  and 
miscellaneous  expense"  on  plant,  which  allowance  was  sustained 
by  the  Supreme  Court  decision.  The  United  States  Circuit  Court 
of  Ohio  in  the  Columbus  Railway  &  Light  Co.  case  allowed 
9  per  cent,  of  the  cost  of  the  physical  property  for  "general 
engineering,  miscellaneous  and  other  expense."  In  the  appraisal 
of  the  steam  roads  the  Railroad  Commission  of  Washington  al- 
lowed 3  1/2  per  cent,  on  the  cost  of  physical  propert}-,  aside  from 
real  estate,  stores,  equipment  and  working  capital,  to  cover 
engineering.  The  same  Commission  in  the  Puget  Sound  Electric 
Railway  case  allowed  7  per  cent,  tor  "superintendence  by 
competent  electrical  engineers  as  distinguished  from  the  services 
of  construction  engineers"  and  an  additional  3  per  cent,  for 
"engineering  and  superintendence  by  constructing  engineers." 
In  the  appraisal  of  the  Michigan  railroads  for  the  State  Com- 
mission 4  per  cent,  was  allowed  for  engineering,  based  on 
the  value  of  the  permanent  way  and  structure,  but  not  the 
equipment. 

It  has  been  argued  that  little  or  no  percentage  should  be  added 
to  cover  omissions  of  inventory  or  errors  in  pricing,  when 
making  an  appraisal,  on  the  ground  that  every  item  of  the  plant 
is  recognizable  and  capable  of  identification.  Theoretically  this 
statement  is  correct,  but  estimates  of  reproduction  must  be 
recognized  as  quite  different  from  estimates  made  on  plans  and 
specifications  for  work  proposed  to  be  done,  which  makes  the 
quantities  definite,  whereas  such  exact  information  is  frequently 
lacking  when  making  an  appraisal,  and  it  is  impossible  to  make 
full  examination  of  buried  structures.  Any  one  who  has  had 
practical  experience  in  the  emploj'ment  of  the  class  of  men  that 
must  be  engaged  in  the  making  of  inventories  and  applying 
prices,  recognizes  the  absolute  impossibility  of  including  each 
item  of  physical  property,  and  the  accurate  pricing  thereof.     To 


STRUCTURAL  COSTS  71 

test  the  truth  of  this  statement,  it  is  only  necessary  for  one  to 
attempt  to  list  every  item  in  a  particular  room  within  a  limited 
but  reasonable  time;  when  the  list  is  complete,  a  leisurely  check- 
ing it  over  will  almost  surely  disclose  certain  items  which  have 
been  omitted.  Experience  shows  that  items  aggregating  thou- 
sands of  dollars  in  value  are  frequently  omitted  from  inventories 
that  are  made  under  the  ordinary  stress  of  appraisal  work,  so 
that  a  reasonable  addition,  covered  by  a  percentage,  must  be 
provided  if  a  fair  appraisal  is  sought.  This  percentage  allow- 
ance will  vary  from  1  or  2  per  cent,  to  15  or  20  per  cent.,  de- 
pending upon  local  conditions. 

The  Public  Service  Commission  of  New  York,  First  District, 
has,  with  one  exception,  uniformly  allowed  5  per  cent,  for  con- 
tingencies, incidentals,  incomplete  inventories  and  administra- 
tion expenses,  during  construction.  In  the  single  instance 
referred  to,  no  allowance  for  omissions  of  inventory  or  error  in 
pricing,  was  considered  necessary.  The  Wisconsin  Commission 
quite  regularly  allows  3  per  cent,  to  cover  legal  expenses  prelimi- 
nary to  construction,  organization  expenses,  insurance,  com- 
mission (not  discount  on  bonds)  and  contingencies.  5  per  cent, 
was  allowed  for  contingencies  in  the  state's  appraisal  of  the 
Minnesota  steam  railroads.  In  the  appraisal  of  the  Chicago 
traction  companies'  properties,  the  Commission  allowed  5  per 
cent,  for  incidentals,  organization  and  incomplete  inventories. 
The  St.  Louis  Public  Service  Commission  has  allowed  5  per  cent, 
for  contingencies  in  addition  to  "some  special  percentages  for 
contingency." 

Real  Estate. — The  proper  value  to  be  allowed  for  real  estate 
and  right  of  way  in  appraisals  is  a  question  on  which  there  is  a 
wide  difference  of  opinion.  There  would  seem  to  be  no  logical 
reason  why  real  estate  or  right  of  way,  belonging  to  a  utility 
company,  should  be  valued  on  any  other  »basis  than  that  of 
similar  property  owned  by  an  individual  or  corporation.  It  is 
undoubtedly  true  in  many  instances,  that  the  building  of  utility 
properties,  particularly  railways,  has  increased  the  value  of 
real  estate  to  the  owners  of  property  adjoining,  or  in  the  vicinity 
of  the  new  roads.  In  cases  of  sale  or  taxation,  the  increased 
value  of  such  property  is  the  only  value  considered,  and  it 
would  seem  as  if  the  railway  company,  for  example,  should  also 
benefit  by  the  general  rise  in  price.  The  acceptance  of  the 
theory  that  the  corporation  is  entitled  to  increases  in  the  value 


72  VALUATION  OF  PUBLIC  UTILITIES 

of  its  real  estate  logically  includes  the  statement  that  any 
decrease  in  value  of  the  property  must  be  also  accepted  by  the 
corporation.  It  is  conceivable  that  the  use  of  property  for 
car-barns  or  gas-works  might  depreciate  the  value  of  land  in  the 
vicinity,  which  as  a  general  rule  should  be  taken  as  the  gage  by 
which  to  measure  the  value  of  utility  property.  This  position 
has  been  repeatedly  affirmed  by  the  courts,  including  the  Supreme 
Court,  which  quotes  with  approbation  a  lower  court,  as  follows: 

"  The  value  of  the  land  depends  largely  upon  the  use  to  which  it  can 
be  put,  and  the  character  of  the  improvements  upon  it."' 

Regarding  the  proper  basis  of  evaluating  real  estate  Judge 
Hough  in  the  Consolidated  Gas  Case  held  as  follows: 

"As  to  the  realty,  the  values  assigned  are  those  of  the  time  of  inquiry; 
not  cost  when  the  land  was  acquired  for  the  j^urpose  of  manufacture, 
and  not  the  cost  to  the  complainant  of  so  much  as  it  acquired  when 
organized  in  1884,  as  a  consolidation  of  several  other  gas  manufac- 
turing corporations.  It  is  objected  that  such  method  of  appraise- 
ment seeks  to  confer  upon  complainant  the  legal  right  of  earning  a 
fair  return  upon  the  land  values  which  represent  no  original  invest- 
ment by  it,  does  not  indicate  land  especially  appropriate  for  the  manu- 
facture of  gas,  and  increases  apparent  assets,  without  increasing  earning 
power.  Analogous  questions  arise  as  to  plant,  mains,  services,  and 
meters;  the  reported  values  w'hereof  are  the  reproductive  cost  less 
depreciation,  and  not  original  cost  to  the  complainant  or  its  predecessors. 
It  appears  by  indisputable  evidence  that  some  of  the  last  items  of 
property  cost  more  than  new  articles  of  the  same  kind  would  have  cost 
at  the  time  of  inquiry;  that  some  are  of  designs  not  now  favored  by  the 
scientific  and  manufacturing  world,  so  that  no  one  now  entering  upon 
a  similar  business  would  consider  it  wise  to  erect  such  machines  or 
obtain  such  apparatus.  In  every  instance,  however,  the  value  assigned 
in  the  report  is  what  it  would  cost  presently  to  reproduce  each  item  of 
property  in  its  present  condition,  and  capable  of  giving  service  neither 
better  nor  worse  than  it  now  does.  As  to  all  of  the  items  enumerated, 
therefore,  from  real  estate  to  meters  inclusive,  the  complainant  demands 
a  fair  return  upon  the  reproductive  value  thereof,  which  is  the  same 
thing  as  the  present  value  properly  considered.  To  vary  the  statement: 
complainants'  arrangements  for  manufacturing  and  distributing  gas  are 
reported  to  be  worth  the  results  above  tabulated  if  disposed  of  (in 
commercial  parlance)  "as  they  are."  Upon  authority  I  consider  this 
method  of  valuation  correct."  *  *  * 

'Columbus  Southern  Railway  vs.  Wright.     151  U.  S.  481. 


STRUCTURAL  COSTS  73 

"The  value  of  the  investment  of  any  manufacturer  in  plant,  factory 
or  goods,  or  all  three,  is  what  his  possessions  would  sell  for  upon  a  fair 
transfer  from  a  willing  vendor  to  a  willing  buyer,  and  it  can  make 
no  difference  that  such  value  is  affected  by  the  efforts  of  himself  or 
others,  by  whim  or  fashion,  or  (what  is  really  the  same  thing)  by  the 
advance  of  land  values  in  the  opinion  of  the  buying  pubhc.  It  is  quite 
immaterial  that  such  value  is  affected  by  difficulties  of  reproduction." 
******* 

"Indeed  the  causes  of  either  appreciation  or  depreciation  are  alike 
unimportant,  if  the  fact  of  value  be  conceded  or  proved." 

******* 

"Nor  can  it  be  inferred  that  such  (American)  government  intended 
to  deny  the  application  of  economic  laws  to  valuation  of  increments 
earned  or  unearned,  while  insisting  upon  the  usual  results  thereof  in 
the  case  of  equally  unearned,  and  possibly  unmerited,  depreciation."^ 

In  the  Kansas  City  Stock  Yards  Case,  the  Circuit  Judge  quotes 
the  Supreme  Court: 

"It  is  not  always  reasonable  to  cast  the  entire  burden  of  the  depreciation 
on  those  who  have  invested  their  money  in  railroads" 

and  adds: 

"The  converse  of  this  proposition  is  equally  true.  If  the  investor  may 
not  bear  all  the  burden  of  the  depreciation,  he  should  not  enjoy  all  the 
benefit  of  the  appreciation." 

"If  improvements  made  in  the  vicinity  of  the  property,  the  growth 
of  city  or  town  where  it  is  located,  the  building  of  railroads,  the 
development  of  the  surrounding  country  and  other  like  causes,  give 
property  an  increased  value,  the  owner  cannot  be  deprived  of  such 
income  by  legislative  action  which  prevents  him  from  realizing  an 
income  commensurate  with  the  enhanced  value  of  his  property."^ 

Some  argument  has  been  advanced  that  the  proper  basis  of 
valuation  is  the  assessed  value,  but  as  such  value  is  usually  a 
conservative,  and  ''hard-times"  value,  below  the  price  at  which 
property  can  be  purchased  under  ordinary  conditions,  it  is  not  a 
proper  basis  of  valuation,  except  for  taxation  purposes  where 
the  real  estate  of  corporations  should  be  placed  on  the  same 
basis  as  other  real  estate. 

An  appraised  value  of  real  estate,  which  depends  on  the  opinion 
of  experts,  will  usually  be  found  to  be  a  very  variable  quantity. 

'Consolidated  Gas  Company  vs.  City  of  New  York.     157  Fed.  849. 
2  Cotting  vs.  Kansas  City  Stock  Yards  82  Fed.  839,  846. 


74  VALUATION  OF  PUBLIC  UTILITIES 

While  the  best  experts  base  their  opinions  on  some  knowledge 
of  actual  transfers,  a  large  element  of  personal  judgment  usually 
enters  into  their  conclusions.  Probably  the  safest  method  to 
pursue  in  determining  the  perplexing  question  of  land  value, 
is  based  on  a  study  and  comparison  of  bona  fide  sales  of  land 
adjoining  or  near  the  property  being  valued.  In  many  instances, 
however,  such  method  cannot  be  used  in  that  property  may 
have  been  held  for  years,  in  large  tracts,  without  change  of 
ownership.  Under  such  circumstances,  the  judgment  of  the 
real  estate  expert  is  probably  as  fair  a  guide  as  can  be  used  in 
determining  values. 

The  Railroad  Commission  of  Wisconsin  has  devoted  much 
time  and  study  to  the  proper  method  of  determining  real  estate 
and  right  of  way  values.  It  has  found  that  railways  are  "willing 
to  pay  two  and  a  half  to  two  and  three-quarter  times  the  market 
price  of  land,  before  they  will  use  their  power  of  condemnation 
in  rural  districts,"  but  this  value  is  largely  due  to  the  necessity 
of  buying  a  comparatively  narrow  strip,  perhaps  100  ft.  wide, 
running  through  the  land.  In  the  well-known  Madison  case, 
the  Wisconsin  Commission's  engineer,  Mr.  W.  D.  Pence,  sub- 
mitted a  memorandum  fully  explaining  the  methods  used  by 
the  engineers  of  that  Commission,  which  methods  are  approved 
by  the  Commission,  and  therefore  here  quoted  at  length. 

"The  Sales  Method. — The  sales  method  of  valuing  real  estate  was  used 
partially  in  the  Michigan  railwa}'  appraisals  of  1900-1901,  and  in  the 
light  of  the  experience  gained  in  that  work  the  method  was  adopted 
in  the  Wisconsin  steam  road  valuation  made  under  the  provisions  of 
the  Ad  Valorem  Assessment  Law  of  1903.  It  has  since  been  exten- 
sivelj'  used  in  Wisconsin  and  elsewhere  in  connection  with  important 
valuations  of  public  service  properties  for  both  rate-making  and  taxation 
purposes,  and  is  generally  accepted  as  a  valuable  aid  to  the  judgment 
by  experts  engaged  in  such  valuation  work  on  a  large  scale.  The 
sales  method  may  be  defined  as  a  plan  or  process  for  the  systematic 
collection  and  comparison  of  data  relating  to  real  estate  transfers 
for  the  purpose  of  estimating  true  market  realty  values.  It  consists 
in  a  study  of  the  transfers  of  neighboring  property  having  conditions 
or  characteristics  similar  to  the  land  whose  value  is  to  be  determined, 
and  is  intended  to  duplicate,  as  nearly  as  may  be,  the  mental  or  judicial 
processes  ordinarily  employed  by  the  so-called  'local  real  estate  expert,' 
with  a  view  to  arriving  at  results  approximating  those  which  would  be 
reached  by  such  local  expert  acting  without  bias  or  suggestion.  The 
sales  method  is  capable  of  application  in  a  variety  of  ways;  in  fact,  is 


STRUCTURAL  COSTS  75 

as  flexible  in  its  possible  applications  as  are  the  varied  methods  employed 
by  individual  local  experts.  Two  interpretations  of  the  sales  method 
have  been  most  commonly  employed.  In  one  of  these  the  area  and 
consideration  in  each  sale  of  similarly  situated  land  is  found,  and  the 
average  unit  price  (per  sc^uare  foot,  per  foot  frontage,  per  lot,  per  acre, 
etc.),  ascertained,  and  this  unit  applied  to  the  tract  under  investigation. 
The  other  application  of  the  method  introduces  what,  in  many  cases,  is 
believed  to  be  an  additional  safeguard,  consisting  of  the  use  of  the 
average  assessed  value  of  adjacent  or  similarly  situated  lands,  in  com- 
bination with  an  average  ratio  or  percentage  representing  the  rela- 
tionship of  the  assessed  value  of  transferred  lands  to  the  total  con- 
sideration paid  for  such  transferred  lands  in  the  district  or  locality 
under  consideration,  all  of  these  figures  being  based  on  the  'ground 
values'  exclusive  of  the  improvements  thereon.  Such  use  of  assess- 
ment figures  is  designed  to  introduce,  as  far  as  may  be,  the  results  of 
the  judicial  processes  of  the  assessor,  who,  at  least  in  theorj-,  serves^ 
on  behalf  of  the  public  as  an  unbiased  expert  in  the  matter  of  relative  ' 
valuations,  and  who  attempts  to  make  allowance  for  the  pecuUar 
attributes  or  characteristics  of  individual  parcels  of  real  estate  in  any 
given  locality  or  neighborhood -of  a  city.  In  the  broader  and  more 
flexible  applications  of  the  sales  method,  the  expert  adopts  one  or  the 
other  of  the  processes  just  outlined,  or  blends  the  two  together  in  such 
fashion  as  to  yield  the  most  consistent  and  trustworthy  final  result. 
In  the  process  of  valuing  a  tract  of  land  involving  conflicting  data,  as 
in  the  case  under  consideration,  the  expert  user  of  the  sales  method 
on  this  flexible  basis  derives  a  series  of  tentative  results  similar  to  the 
results  representing  the  judgments  of  individual  local  experts.  The 
judicial  function  involved  in  the  discriminating  selection  of  data  and 
in  the  derivation  of  final  results  is  exercised  along  essentially  parallel 
lines  with  the  two  classes  of  experts  here  compared.  The  further  act 
of  the  judgment  in  selecting  a  final  preferred  valuation  figure  in  the 
light  of  a  group  of  preliminary  or  tentative  results  is  identical  in  the 
two  cases.  In  the  particular  valuations  here  considered,  the  similarity 
of  the  basis  is  further  emphasized  by  the  fact  that  the  results  by  the 
sales  method  represent  the  composite  judgment  of  four  members  of 
the  Commission's  expert  staff,  as  against  an  equal  number  of  local 
real  estate  experts  employed  by  the  company.  The  foregoing  state- 
ment relates  to  the  revised  or  final  figures  submitted  at  the  conclusion 
of  this  memorandum,  these  figures  replacing  the  preliminary  or 
tentative  land  valuations  formerly  submitted  on  behalf  of  the  Com- 
mission's staff.  Although  it  is  frankly  conceded  that  the  tentative 
land  valuation  figures  first  reported  were  derived  bj^  a  comparatively 
restricted  application  of  the  sales  method,  issue  is  here  taken  with 
certain  claims  made  in  the  argument  by  counsel  for  company.     In  view 


76  VALUATION  OF  PUBLIC  UTILITIES 

of  the  repeated  favorable  reference  by  counsel  to  the  judgment  of  the 
assessor  with  respect  to  relative  values  ('Argument  on  Behalf  of 
Company,'  pp.  30,  31,  32,  37,  39),  the  criticism  of  a  similar  use  of  the 
assessor's  judgment  by  the  Commission's  experts  need  scarcely  be 
considered,  except  with  respect  to  the  misapprehension  by  counsel 
('Argument,'  p.  43),  as  regards  the  fluctuation  of  the  assessment  ratio 
in  MacUson.  Entirely  aside  from  the  claim  that  assessment  ratios  should 
not  be  depended  upon  in  making  land  valuations,  counsel  contends 
that,  in  any  event,  a  general  assessment  ratio  should  not  be  used  in 
the  case  under  consideration,  chiefly  because  of  a  supposed  'radical 
difference  as  between  different  sections  or  locahties'  in  the  city  of 
Madison.  For  the  purpose  of  throwing  some  hght  on  this  point,  Mr. 
A.  E.  James,  statistician  of  the  tax  commission,  was  requested  to  prepare 
a  comparative  exhibit  based  on  Madison  city  sales  for  a  period  of  years, 
classified  with  respect  to  kind  or  locality  as  follows: 

Group  1 Business  section. 

Group  2 Best  re.sidence  .section. 

Group  3 Middle  clas.s  residence  section. 

Group  4 Poor  residence  section. 

"Table  A  gives,  in  condensed  form,  the  results  of  this  investigation, 
which  covered  some  905  verified  real  estate  transfers  during  the  four 
year  period,  1905-1908,  with  an  aggregate  con.sideration  of  approxi- 
mately $3,000,000.  A  somewhat  similar,  though  less  discriminating, 
comparison  made  in  1906  covering  sale  and  assessment  figures  for  the 
seven-year  period  ending  with  1904  affords  the  following  general  average 
ratios  for  the  four  groups  of  property  of  71  per  cent.,  67  per  cent., 
65  per  cent,  and  64  per  cent.,  respectively,  with  an  average  for  the 
aggregate  for  the  seven-year  period  of  66.7  per  cent.  To  bring  the 
comparison  still  closer  to  the  point  at  issue,  'locality  ratios '  were  cora- 
l)uted  from  carefully  verified  transfers  within  an  area  of  some  26  blocks, 
including  a  district  of  from  three  to  four  blocks  in  all  directions  from 
the  tracts  owned  by  the  ]\Iadison  Gas  and  Electric  Company.  The 
results  of  these  compilations  for  a  period  of  six  years,  ending  in  1908, 
are  embodied  in  Table  B,  which  also  includes  the  revised  general  ratios 
for  the  entire  city  for  the  corresponding  years.  The  ratio  for  the 
three  years,  1906-1908,  for  which  most  recent  data  as  to  present  values 
are  available,  average  65.6  per  cent,  local,  as  against  64.7  per  cent, 
general. 

"The  foregoing  comparisons  do  not  justify  the  claim  of  coun.sel  with 
respect  to  the  extreme  variations  at  Madison.  The  contrary  appears 
to  be  the  case. 

"The  question  as  to  whether  the  general  or  local  assessment  ratio 
should  be  applied,  or  assessment  figures  be  used  at  all,  depends  entirely 


STRUCTURAL  COSTS 


77 


on  circumstances  which  the  expert,  famihar  with  the  use  of  the  sales 
method,  will  investigate  and  take  into  account  before  reaching  his 
final  judgments  as  to  the  value  of  a  given  tract  of  land.  In  this 
particular  instance  the  values  of  the  local  and  general  ratios  chance  to 
differ  but  little. 


TABLE  A.— COMPARISON  OF  ASSESSMENT  RATIOS  WITH  REFER- 
ENCE TO  KIND  OF  PROPERTY.     BASED  ON  A  SECTIONAL 
DISTRIBUTION  OF  MADISON  CITY   SALES. 


Year 

Group 

No.  of  sales 

Total 
assessment 

Total  con- 
sideration 

Assess't 

ratio  per 

cent. 

1905 

1 
2 
3 

4 

4 

54 

68 

152 

$16,400 
127,365 
126,870 
200,225 

$26,100 
188,321 
203,555 
354,614 

62.83 
67.63 
62.32 
56.47 

Total  sales,  1905 

278 

$470,860 

$772,590 

60.95 

1906 

1 
2 
3 
4 

10 

41 

47 

110 

$52,100 
97,470 
91,650 

144,880 

$82,600 
143,100 
132,038 
224,400 

63.08 
68.10 
69.41 
64.56 

Total  sales,  1906 

208 

$386,100 

$582,138 

66.33 

1907 

1 

2 
3 

4 

3 

48 

42 

127 

$21,200 
151,520 
104,570 
199,158 

$30,680 
229.430 
160,730 
328,707 

68.10 
66.04 
65.06 
60.58 

Total  sales,  1907 

220 

$476,448 

$749,547 

63.58 

1908 

1 
2 
3 

4 

6 

45 

44 

104 

$213,000 

140,770 

78,200 

157,000 

$269,825 
237.350 
131,745 
266,590 

78.94 
59.30 
59.35 
58.89 

Total  sales,  1908 

199 

$588,970 

$905,510 

65.03 

05-1908 1 

1 
groups, 

905 

$1,922,378 

$3,009,785 

63.87 

Summary  for  four  years  by 
1905-1908:  group  1.  .  . 

23  (2%) 
188  (21 %) 
201  (22%) 
493  (55%) 

$302,700 
517,125 
401,290 
701,263 

$409,205 
798.201 
628,068 

1.174,311 

73  96 

2 

64.78 
63.89 
59.71 

3 

4 

1 

Grand  total,  four  years 

905  (100%) 

$1,922,378 

$3,009,785 

63.87 

78 


VALUATION  OF  PUBLIC  UTILITIES 


TABLE  B.  — COMPARISON  BETWEEN  ASSESSMENT  RATIO 
FOR  THE  IMMEDIATE  LOCALITY  OF  THE  MADISON  GAS  & 
ELECTRIC  COMPANY'S  PROPERTY  WITH  CORRESPONDING 
VALUES  OF  THE  GENERAL  ASSESSMENT  RATIO  FOR  THE 
ENTIRE  CITY  OF  MADISON 


Year 

No.  of 

sales 

Locality 

assessment 

ratio,  per 

cent. 

Assessment 
ratio  for 

entire  city, 
per  cent. 

1903                   

6 
8 
9 
3 
4 
10 

62.8 
75.2 
61.6 
61.1 
68.9 
66.8 

64.0 

1904             

62.9 

1905         

62.0 

1906       

65.4 

1907             

63.6 

1908         

65.0 

Average.... 

66.1 

63.8 

"Calibration  of  Sales  Method. — In  viewof  the  close  similarity  as  to 
fundamental  basis  of  the  sales  method  as  compared  with  the  local 
expert  method  of  valuing  real  estate,  particular  interest  and  importance 
attaches  to  any  specific  cases  affording  a  direct  comparison  of  actual 
valuation  results  by  the  two  methods  made  under  normal  or  balanced 
conditions.  The  results  of  two  such  comparisons  on  a  large  scale  are 
fortunately  available  for  the  present  discussion,  one  involving  some 
300  blocks  (more  than  3  square  miles)  of  representative  residential 
property  in  the  city  of  St.  Paul,  the  other  of  some  500  acres  of  valuable 
railway  terminal  lands  in  the  city  of  Milwaukee. 

"The  St.  Paul  investigation  was  conducted  by  Mr.  T.  A.  Polleys, 
.secretary  of  the  Chicago,  St.  Paul,  Minneapolis  &  Omaha  Railway 
Company,  who  for  a  number  of  years  had  made  extensive  studies  of 
real  estate  sales  and  valuations  in  Wisconsin,  Minnesota  and  neighboring 
states.  After  serving  on  a  committee  made  up  of  local  real  estate 
experts,  charged  with  the  inauguration  of  a  reform  in  the  basis  of  asses- 
sing real  estate  in  the  city  of  St.  Paul,  Mr.  Polleys  conceived  of  a  plan 
for  calibrating  or  testing  the  accuracy  of  the  sales  method  of  valuing 
lands,  with  a  view  of  stimulating  local  interest  in  the  matter.  To  this 
end  he  chose  the  district  in  the  westerly  portion  of  the  city  of  St.  Paul, 
comprising  over  300  platted  blocks,  extending  from  Western  Avenue 
on  the  east  to  Cleveland  Avenue  on  the  west  (a  distance  of  3  1/2  miles), 
and  from  Marshall  Avenue  on  the  north  to  Osceola  Avenue  on  the  south 
(a  distance  of  nearly  a  mile),  as  indicated  by  the  shaded  rectangle  on 
the  accompanying  map.     The  district  was  selected  for  the  reason  that 


STRUCTURAL  COSTS  79 

the  great  activity  for  several  preceding  years  would  insure  ample 
sales  data  upon  which  to  base  estimates  of  value,  and  because  of  the 
representative  characteristics  of  the  territory,  such  as  the  following: 
Values  ranging  from  one  dollar  to  over  one  hundred  dollars  per  foot  front; 
a  portion  of  the  lots  built  over  and  a  portion  vacant;  some  localities 
increasing  very  rapidly  in  value  and  others  little  or  none;  the  area  com- 
paratively uniform  in  topography,  although  somewhat  broken  in  places; 
in  short,  a  district  affording  a  wide  range  of  conditions  for  such  a  com- 
parative test.  The  process  was  directed  to  the  determination  of  the 
correct  average  'ground '  value  per  foot,  exclusive  of  improvements, 
in  a  given  year  (1907)  for  a  distance  of  one  block  along  a  given  street, 
each  block  frontage  being  termed  a  'locality'  for  the  purposes  of  this 
test.  The  average  ground  values  per  foot  front  for  each  of  the  277 
'localities'  was  ascertained  by  a  flexible  application  of  the  sales  method, 
the  work  being  performed  chiefly  by  ]\Ir.  PoUeys  personally,  who  then 
requested  some  fourteen  highly  qualified  real  estate  experts  in  the  city 
of  St.  Paul  to  submit  their  estimates  of  the  same  values.  In  order  to 
arouse  interest  in  the  investigation,  Mr.  PoUeys  charted  his  own  determin- 
ations and  submitted  duplicate  copies  of  the  same  to  each  of  the  experts, 
with  the  urgent  request,  however,  that  they  should  not  be  influenced 
by  his  figures,  and  further  that  values  be  submitted  only  on  those  blocks 
where  they  had  direct  personal  knowledge  of  values.  The  experts 
served  without  compensation,  acted  independently  of  each  other,  that 
is,  without  conference  or  collusion  of  any  sort,  and,  so  far  as  known, 
were  entirely  free  of  bias  or  suggestion  in  preparing  their  estimates  of 
value.  Of  the  fourteen  experts  invited  some  twelve  submitted  more 
or  less  complete  responses,  most  of  them  asking  for  additional  time  for 
fuller  dehberation  as  to  values.  The  condensed  results  of  this  re- 
markable investigation  are  shown  in  the  accompanying  Table  C,  and 
the  complete  exhibit  for  a  single  representative  street  (Lincoln  Avenue), 
comprising  some  21  locahties,  are  given  in  Table  D.  In  further  illustra- 
tion of  the  methods  pursued  in  these  studies,  there  are  submitted  with 
this  memorandum,  in  addition  to  the  map,  a  copy  of  a  paper  describing 
this  investigation  (Real  Estate  Valuations,  by  Thomas  A  Polley.s — 
Proceedings  Minnesota  Academy  of  Social  Sciences,  Vol.  I,  pp.  59-7S, 
1907).  I  am  also  able  to  submit  as  information,  through  the  courtesy 
of  ^Ir.  PoUeys,  the  original  figures  of  the  twelve  experts  and  the  reduction 
sheets  leading  to  the  final  comparative  figures,  these  papers  having 
been  loaned  to  the  Commission's  engineer  during  a  recent  personal 
investigation  of  the  conditions  surrounding  this  test  of  the  sales  method. 
While  on  the  ground,  conference  was  held  with  the  president  of  the 
St.  Paul  real  estate  exchange,  who  participated  in  the  PoUeys  investi- 
gation and  who  regards  the  sales  method  as  an  exceedingly  valuable 
aid  to  the  judgment,  subject  to  limitations  of  a  character  in  certain 
situations  which  are  recognized  and  felt  by  all  local  experts  who  are 
called  upon  to  value  lands. 


80 


VALUATION  OF  PUBLIC  UTILITIES 


TABLE  C— COMPARISON  OF  RESULTS  BY  TWO  METHODS  OF 
VALUING  REAL  ESTATE  (A)  BY  LAND  SALES  METHOD; 
AND  (B)  BY  LOCAL  EXPERTS.  INVESTIGATION  BY  THOS. 
POLLEYS,  AT  ST.  PAUL,  MINN. 


Ciassification  of  Property 


Average  value 
No.  of  per  front  foot 
blocks 


Excess 
(B)  over  (A) 


(A) 


(B) 


Amount   Per  cent. 


Group  1  Less  than  SIO  per  front  foot ....  96 

2  SIO  to  S20  per  front  foot ,  69 

3  S20  to  S40  per  front  foot '  82 

4  Above  S40  per  front  foot 30 

Totals 277 


S6.15 
14.10 
28.55 
63.10 


S6.70 
15.45 
29.55 
63.20 


SO.  55 
1.35 
1.00 
0.10 


9.0 
9.6 
3.5 
0.2 


S20.9O   S21.75  I  $0.80 


3.8 


TABLE   D.— POLLEYS'   INVESTIGATION  OF  SALES  METHOD  OF 

VALUING    REAL    ESTATE    COMPARISON    OF    RESULTS 

ALONG  LINCOLN  AVENUE,  ST.  PAUL 


Average  ground  value 
per  front  foot 


Along  Lincoln  Avenue  (3  1/2  mUes) 


(A)  By 
land 
sales 

process 


(B)  By  local 
experts 


No.  of 
experts 


1.  Dale  to  St.  Albans 

2.  St.  Albans  to  Grotto.  .  .  . 

3.  Grotto  to  Avon 

4.  Avon  to  Victoria 

5.  Victoria  to  Milton 

6.  Milton  to  Chatsworth. 

7.  Chatsworth  to  Oxford 

8.  Oxford  to  Lexington.    . 

9.  Lexington  to  Dunlap 

10.  Dunlap  to  Griggs 

11.  Griggs  to  Syndicate 

12.  Syndicate  to  Hamline. .  . 

13.  Hamline  to  Albert 

14.  Albert  to  Pascal 

15.  Pascal  to  Saratoga 

16.  Saratoga  to  Snelling 

17.  Macalester  to  Cambridge. 

18.  Cambridge  to  Bald%\-in. . . 

19.  Baldw-in  to  Fair\iew.  .  .  . 

20.  Fair\'iew  to  Prior 

21.  Prior  to  Cleveland 


S47.00 

49.00 

49.00 

50.00 

35.75 

29.00 

27.50 

24.00 

15.00 

12.00 

8.50 

8.50 

7.00 

7.00 

5.00 

5.00 

9.00 

9.00 

9.00 

3.50 

3.50 


Value 


Excess 
(B)  over  (A) 


Amount 


Per  cent. 


S50.85 

51.20 

51.80 

51.65 

36.05 

29.85 

26.55 

24.20 

16.45 

12.20 

8.90 

9.35 

8.05 

7.95 

6.40 

5.90 

9.35 

9.20 

9.20 

3.90 

4.10 


$3.85 
2.20 
2.80 
1.65 
0.30 
0.85 
0.95 
0.20 
1.45 
0.20 
0.40 
0.85 
1.05 
0.95 
1.40 
0.90 
0.35 
0.20 
0.20 
0.40 
0.60 


8.2 

4.5 

5.7 

3.3 

0.8 

2.9 

3.5 

0.8 

1.0 

1.7 

4.7 

10.0 

15.0 

14.0 

28.0 

18.0 

3.9 

3.2 

2.2 

11.4 

17.2 


Average  for  21  blocks S19.75 


$20.60        SO. 85 


4.3 


STRUCTURAL  COSTS  81 

"Tables  C  and  D  show,  in  the  last  column,  the  percentages  variation 
between  the  results  of  the  sales  method  and  the  averages  of  the  results 
of  the  local  experts.  It  is  seen  that  the  tendency  of  the  sales  method 
is  to  give  deficient  results  to  an  average  amount  of  3.8  per  cent,  for 
the  entire  277  localities  or  blocks. 

"This  result  or  tendency  is  strikingly  confirmed  by  the  other  instance 
above  referred  to,  consisting  of  the  valuation  of  terminal  lands  belonging 
to  the  Chicago,  ^Milwaukee  &  St.  Paul  Railway  Company  in  the  city  of 
Milwaukee,  made  in  1903  under  the  auspices  of  the  Tax  Commission. 
These  lands  amounted  to  upward  of  500  acres  in  the  aggregate, 
scattered  through  some  15  wards  or  assessment  districts  of  the  city, 
and  having  an  aggregate  valuation  of  approximately  S6. 000,000.  The 
market  value  of  these  railroad  lands  was  determined  by  specially  (luali- 
fied  local  real  estate  experts  under  the  personal  direction  of  Mr.  F.  W. 
Adams,  the  secretary  of  the  railway  company,  who  preserved  a  re- 
markable balance  of  judgment  throughout  the  work.  The  state  valua- 
tion staff,  under  the  personal  direction  of  Prof.  W.  D.  Taylor,  engineer 
for  the  state  board  of  assessment,  used  the  sales  method  on  a  basis 
consistent  with  local  conditions.  The  final  results  differed  by  only  3.5 
per  cent.,  the  results  by  the  sales  method  being  the  lower,  as  in  the 
Polleys  investigation. 

"As  a  result  of  the  elaborate  series  of  tests  above  described,  it  appears 
that,  taking  the  results  by  the  '  local  expert  method '  as  a  basis,  the 
'  sales  method '  tends  to  give  slightly  lower  results,  the  difference  appear- 
ing to  be  about  4  per  cent,  on  the  average. 

"Final  Revised  Values. — The  final  valuation  figures  for  the  two  tracts 
of  land  submitted  by  the  Commission's  valuation  staff  in  the  light  of  all 
available  evidence,  including  the  testimony  submitted  by  the  local 
experts  and  the  results  of  the  comparative  tests  of  the  sales  method 
above  described,  are  as  follows  for  the  year  1908: 

"Block  131. — The  revised  valuation  of  block  131  is  placed  by  the 
Commission's  staff  at  S42,000,  with  a  possible  range  from  $37,  000  as  a 
minimum  to  $47,000  as  a  maximum. 

"Part  of  Block  126. — The  valuation  of  this  tract  presents  special 
difficulties,  owing  chiefly  to  extreme  scarcity  of  trust-worthy  sales 
figures  in  the  immediate  locality.  The  revised  valuation  of  this  tract 
is  placed  by  the  Commission's  staff  at  $18,000  with  a  possible  range 
from  $16,000  as  a  minimum  to  $20,000  as  a  maximum." 

The  decision  in  the  Madison  case  then  continues  with  the 
opinion  of  the  Commission  as  to  value  of  the  methods  used  by 
its  engineers  as  follows: 

"The  preceding  memorandum  submitted  by  the  engineer  appears  to 
us  to  be  of  the  greatest  importance.  It  describes  the  methods  used  by 
the  engineer  and  his  staff  in  determining  the  value  of  real  estate  and 

6 


82  VALUATION  OF  PUBLIC  UTILITIES 

shows  that  these  methods,  when  properly  employed,  are  scientific  and 
that  they  lead  to  correct  conclusions.  The  engineers  of  the  staff  have 
employed  these  methods  very  extensively  in  the  valuation  of  real  prop- 
erty in  all  parts  of  the  state,  and  generally  with  satisfactory  results. 
The  engineers  are  also  unbiased  in  their  attitude  toward  proceedings  such 
as  those  involved  here.  They  are  witnesses  for  neither  petitioner  nor 
respondent  and  have  only  one  aim  in  mind;  namely,  that  of  arriving 
at  the  truth  through  the  application  of  correct  methods  of  investigation, 
and  their  experience  and  training  entitle  them  to  be  classed  as  experts 
in  such  matters.  It  is,  of  course,  a  fact  that  the  determination  of  the 
market  value  of  any  piece  of  real  property  is  ultimately  a  matter  of 
judgment,  and  that  no  method  of  valuation  yet  discovered  will  disclose 
the  exact  value  or  do  much  more  than  indicate,  within  perhaps  fairly 
narrow  limits,  the  figure  at  which  the  value  should  be  placed.  But  it 
is  believed  that  the  methods  thus  employed  by  the  staff  are  the  best 
that  have  thus  far  been  used  for  this  purpose.  While  in  actual  appU- 
cation  they  may  not  disclose  the  actual  figure  at  which  the  value  should 
be  fixed,  they  cannot  fail  to  be  of  the  greatest  importance  in  appraisals 
of  this  kind.  When  properly  employed,  they  will  disclose  facts  that 
indicate  approximate  values,  and  facts  that  are  of  the  greatest  aid  to 
the  judgment  in  arriving  at  the  fair  value  in  each  particular  case. 

"The  main  question  involved  in  the  valuation  of  a  utility  for  rate- 
making  purposes  is  to  find  the  fair  value,  or  that  value  upon  which  the 
investors  are  entitled  to  reasonable  returns  and  which  is  equitable  as 
between  the  investors  on  the  one  hand  and  the  customers  on  the  other. 
This  appHes  as  much  to  the  valuation  of  the  real  property  of  the  utility 
that  is  used  or  useful  in  connection  with  the  services  it  renders,  as  to  any 
other  part  of  the  property  that  is  so  used,  or  to  the  plant  as  a  whole. 
In  this  particular  case,  this  value  would  seem  to  be  somewhat  lower 
than  the  valuation  which  was  claimed  by  the  respondents  and  consider- 
ably greater  than  the  estimated  value  of  the  real  property  by  the 
petitioner's  witnesses.  The  facts  indicate  that  the  fair  value  is  found 
about  midway  between  the  maximum  and  minimum  values  as  deter- 
mined by  the  staff.  In  fact,  it  is  our  judgment  that  it  should  be  placed 
at  about  $44,500  for  the  lots  located  in  block  131  and  at  about  $17,500 
for  the  lots  in  question  in  block  126,  or  at  about  $62,000  for  both.  Of 
these  amounts,  according  to  the  estimates  of  the  engineer  in  his  first 
valuation,  about  83  per  cent,  of  the  former  item  should  be  allotted  to 
the  gas  plant,  while  17  per  cent,  of  the  former  and  all  of  the  latter  should 
be  allotted  to  the  electric  plant."* 

In  valuing  city  property,  it  is  quite  customary  to  add  10  per 
cent,  for  plottage,  namely  the  extra  cost  of  acquiring  property 

'  State  Journal  Ptg.  Co.  vs.  Madison  Gas  &  Electric  Co.  Decision  dated 
Mar.  8,  1910,  p.  528 — Railroad  Commission  of  Wisconsin. 


STRUCTURAL  COSTS  83 

in  small  pieces  and  bringing  it  under  a  single  ownership.  In 
the  same  way,  25  per  cent,  of  the  value  of  an  inside  lot  is  added 
to  determine  the  value  of  a  corner  lot.  For  narrow  strips  of 
land  100  ft.  wide  or  less,  used  for  right  of  way  from  one-third  to 
five  times  the  value  of  the  adjoining  land  is  added  to  cover  the 
increased  cost  of  such  pieces. 

The  Public  Service  Commission  of  New  York,  First  District, 
has  used  appraised  values,  assessed  values,  and  double  the 
assessed  value,  in  determining  the  fair  value  of  real  estate,  in  its 
various  decisions. 

The  Board  of  Railway  Commissioners  of  South  Dakota,  in 
appraising  the  railway  properties  of  that  State,  took  2  1/2  times 
the  actual  cost  of  farm  land  at  the  time  of  appraisal,  as  the 
value  allowed  for  right  of  way.  The  Texas  Commission  has 
usually  added  from  25  to  50  per  cent,  additional  to  the  value  of 
adjoining  land,  to  obtain  the  value  allowed  in  the  valuation  of 
the  steam  roads  of  that  State. 

While  the  steam  railroads  usually  prefer  to  purchase  necessary 
real  estate  outright,  the  inter-urban  electric  roads,  telephone, 
telegraph  and  transmission  companies  very  frequently  purchase 
the  right  to  use  property  or  easements  instead  of  taking  title  to 
real  estate.  Such  investments  result  in  an  increase  in  the  in- 
tangible property,  as  of  course  the  companies  purchasing  such 
rights  of  way  have  no  title  whatever  to  the  real  estate,  to  show 
for  their  investment. 

Paving. — There  exists  considerable  difference  of  opinion  and 
some  confusion  of  thought  as  to  whether  the  value  of  pavement 
over  structures  in  streets  should  be  included  in  appraisals  and 
allowed  as  part  of  capitalization.  If  the  fundamental  purpose 
of  the  inquiry  is  to  ascertain  the  actual  investment  made,  then 
only  the  cost  of  such  paving  as  was  laid  by  the  corporation 
should  be  considered,  if  the  cost  of  reproduction  new  of  such 
pavement  as  was  put  down  at  the  expense  of  the  corporation  is 
sought,  then  such  treatment  of  the  paving  may  be  proper,  but  when 
the  problem  is  to  find  the  cost  of  reproduction  new  of  property 
at  a  particular  date,  the  estimated  cost  of  paving  necessary  to 
be  laid  in  replacing  the  substreet  structure,  should  be  taken. 

It  is  assumed  in  every  case  that  the  pavement  in  the  street 
does  not  belong  to  the  corporation  whether  the  structure  in  the 
street  has  been  installed  before  or  after  the  laying  of  the  pave- 
ment.    Of  course  if  the  pavement  has  been  laid  first,  and  the 


84  VALUATION  OF  PUBLIC  UTILITIES 

structure  afterward  the  expense  of  placing  the  pavement  must  be 
borne  by  the  corporation,  and  under  such  circumstances  as  these, 
there  is  usually  little  question  but  that  the  estimated  cost  should 
be  allowed  the  corporation  as  a  part  of  its  expense  of  construction, 
and  is  therefore  proper  for  capitalization.  The  Wisconsin 
Commission^  has  uniformly  ruled  that  in  a  valuation  for  rate 
purposes  the  cost  of  pavement  reproduction  will  not  be  allowed 
unless  the  pavement  has  been  laid  at  the  expense  of  the  cor- 
poration. This  view  has  been  taken,  though  somewhat  equivo- 
cally, by  the  Iowa  Supreme  Court  which  held  that  the  cost  of 
pavement  over  gas  mains  laid  before  the  pavement  was  put 
down,  should  not  be  included  as  part  of  the  value  on  which 
rates  should  be  based,  expressly  ignoring  the  expense  that  would 
be  incurred  in  case  it  were  found  necessary  to  remove  the  pipes 
at  the  expiration  of  the  franchise,  or  for  other  cause,  explaining 
that  most  of  the  paved  streets  were  paralleled  by  unpaved  alleys 
or  parkways,  in  which  pipes  might  be  laid  without  removing  the 
pavement  and  admitting  ''undoubtedly  the  values  of  the  pipe 
are  somewhat  enhanced  because  of  their  location,  but  the 
immediate  cost  of  opening  and  replacing  the  pavement  is  not  the 
criterion  for  the  value  which  should  be  adopted."- 

The  Public  Service  Commission  of  New  York  State,  First 
District,  has  both  allowed  and  excluded  the  value  of  all  pave- 
ment over  street  sub-structures.  It  was  allowed  for  example  in 
the  Third  Avenue  Railroad  Co.  Reorganization  Case,^  but  in 
several  recent  decisions  the  value  of  such  paving  as  has  been 
laid  after  the  structures  were  in  place  has  been  excluded.  The 
present  attitude  of  this  Commission  is  clearly  set  forth,  for 
example,  in  its  recent  opinion  published  a  few  months  ago  in  the 
case  of  Kings  County  Lighting  Company,  where  in  passing  on 
the  company's  claim  for  an  allowance  for  all  paving  over  its 
structures  the  commission  says: 

"The  practical  effects  of  such  a  theory  are  interesting  and  important. 
Suppose  a  locality  at  the  time  a  gas  company  was  started  and  its  pipes 

'  State  Journal  Printing  Co.  vs.  Madison  Gas  &  Elec.  Co.,  decided  March 
8,  1910  (4  W.  R.  C.  R.  501,  554);  Ashland  vs.  Ashland  Water  Co.,  decided 
Nov.  1,  1909  (4  W.  R.  C.  R.  273,  307);  Racine  vs.  Racine  Gas  Light  Co., 
decided  Jan.  27,  1911  (6  W.  R.  C.  R.  228,  240). 

=>  Cedar  Rapids  Gas  Light  Co.  vs.  Cedar  Rapids  120  N.  W.  966. 

'  Case  No.  1181  Plan  of  Reorganization  Third  Ave.  Railroad  Co.  Decision 
dated  July  29,  1910,  Public  Service  Commission,  First  District,  New  York. 


STRUCTURAL  COSTS  85 

laid  were  content  to  have  unpaved  or  cheaply  paved  streets,  cobble- 
stone, macadam  or  gravel  being  used.  Suppose  that  the  people 
come  to  demand  better  paving,  being  dissatisfied  with  earlier  conditions, 
and  that  asphalt,  brick  or  granite  block  with  a  concrete  base  is  laid 
throughout  the  area.  Naturally,  the  people  appreciate  that  they  must 
pay  the  cost  of  the  rei^aving;  but  according  to  the  theory  of  counsel  for 
the  company,  the  gas  consumer  must  also  pay-more  for  gas.  In  other 
words,  every  time  the  streets  are  improved,  not  only  do  taxes  or  assess- 
ments go  up,  but  higher  gas  rates  are  justified,  notwithstanding  the 
fact  that  the  company  may  not  have  paid  one  dollar  in  connection  there- 
with. If  this  theory  is  correct,  citizens  must  consider  in  connection 
with  every  civic  improvement  its  effect  upon  rates  for  gas,  electricity, 
telephone  service,  water,  transportation  and  every  other  service  which 
involves  the  use  of  the  subsurface  of  the  streets.  If  such  improvement 
increases  the  cost  of  reproducing  the  undertaking  supplying  such  service, 
higher  rates  will  thereby  be  justified  than  would  be  reasonable  before 
such  improvement  is  made. 

"Applying  the  theory  of  counsel  to  the  case  in  hand,  he  asks 
that  in  ioto  about  $250,000  or  1300,000  be  added  in  determining  the 
"fair  value"  of  the  property,  such  sum  including  not  merely  the  net 
cost  of  the  paving,  but  'overhead  charges'  amounting  to  20  per  cent, 
or  thereabouts.  A  return  of  10  per  cent,  thereon  would  be  from  $25,000 
to  $30,000.  Upon  the  basis  of  actual  sales  for  1910,  this  is  equivalent 
to  from  4  to  5  cts.  per  thousand.  Thus,  the  net  result  of  counsel's 
theory  is  that  this  Commission  is  asked  to  fix  a  rate  higher  by  4  or 
5  cts.  than  would  otherwise  be  reasonable,  and  the  reason  offered  in 
essence  is  that  since  the  Kings  County  Co.  laid  its  mains  and  services 
the  city  of  Brooklyn  and  later  the  city  of  New  York  has  materially 
improved  the  paving  over  those  pipes  without  expense  to  the  company. 

"The  company's  counsel  apparently  relies  upon  a  single  thesis  to 
maintain  his  theory.  He  may  not  claim  that  the  pavement  is  the 
property  of  the  company,  for  it  is  not  in  any  degree.  The  company 
may  not  alter  the  pavement  without  the  city's  permission,  nor  sell, 
transfer  or  remove  it,  and  in  case  the  company  does  take  up  its  pipes 
and  leave  the  street,  the  pavement  must  be  restored.  Secondly,  the 
company  did  not  lay  the  new  paving.  It  was  laid  by  the  city  after  the 
company's  pipes  were  in  the  ground.  In  the  third  place,  the  new  paving 
represents  no  expenditures  upon  the  part  of  the  company.  This  fact 
is  important,  for  it  is  conceivable  that  a  company  might  not  own  certain 
})roperty,  might  not  have  actually  constructed  it,  and  yet  the  expense 
of  such  construction,  if  paid  by  the  company,  might  properly  be 
included  in  the  amount  upon  which  the  company  would  be  entitled  to 
earn  a  fair  return.  But  in  this  case,  the  new  pavement  under  discussion 
does  not  represent  any  investment  or  expenditure  by  the  company. 


86  VALUATION  OF  PUBLIC  UTILITIES 

The  relaying  of  the  original  paving  does  and  it  has  been  included  in 
'net  cost'  as  above  set  forth. "^ 

The  above  quotation  very  fairly  sets  forth  the  usual  argu- 
ments for  omitting  from  corporation  valuation  such  part  of 
paving  as  has  not  been  laid  at  the  expense  of  the  corporation, 
but  such  partisans  apparently  fail  to  appreciate  the  illogical  posi- 
tion of  setting  out  to  obtain  the  cost  of  re-production,  and  then 
instead  of  taking  that  cost  to  include  only  such  part  of  said  cost 
as  appeals  to  them.  If  the  date  of  construction  is  to  be  the 
test,  then  original  costs  should  be  considered;  if  the  date  of  ap- 
praisal is  the  test,  then  cost  of  replacement  throughout  must 
apply.  It  is  manifestly  illogical  and  unfair  to  pretend  to  figure 
the  cost  of  re-producton  and  then  omit  certain  items  from  such 
basis  of  valuation  apparently  for  the  reason  that  the  inclusion 
of  such  items  would  result  in  a  considerable  increase  in  the  value 
of  corporate  property.  Because  a  corporation  has  had  the 
judgment  and  foresight  to  install  its  structures  in  advance  of  or 
coincident  with  paving,  perhaps  carrying  its  investment  for 
years  without  profit,  that  is  no  reason  for  excluding  a  part  of  the 
cost  of  replacement  any  more  than  it  would  be  to  omit  increase 
in  real  estate  values.  As  the  New  York  Commission  itself  says 
in  the  decision  above  referred  to,  the  Supreme  Court  has  held 
"in  order  to  ascertain  that  value  (fair  value  being  used  for  the  conven- 
ience of  the  public)  the  original  cost  of  construction,  the  amount  ex- 
pended in  permanent  improvement,  the  amount  and  market  value  of 
its  bonds  and  stock,  the  present  as  compared  with  the  original  cost  of 
construction,  the  probable  earning  capacity  of  the  property  under 
regular  rates  prescribed  by  statute,  and  the  sum  required  to  meet 
operating  expenses,  are  all  matters  for  consideration,  and  are  to  be 
given  such  weight  as  may  be  just  and  right  in  each  case."  ^ 

So  that  the  cost  of  reproduction  is  not  the  only  necessary  con- 
sideration, but  one  of  the  considerations  which  should  be  used, 
there  exists  no  judicial  pronunciamento  for  taking  a  part  of  the 
estimated  cost  of  reproduction  and  leaving  out  the  other  part. 
More  important  than  conclusions  of  commissions  or  opinions  of 
State  Courts  is  the  decision  of  the  Supreme  Court,  which,  in  at 
least  one  case  is  pertinent.  The  Consolidated  Gas  Company 
questioned  the  right  of  the  New  York  State  Legislature  to  reduce 

'  Case  No.  1273  J.  G.  Mayhew  vs.  Kings  County  Lighting  Co.,  decision 
dated  Oct.  20,  1911,  Public  Service  Commission,  First  District,  New  York. 
2  Smyth  vs.  Ames  160  U.  S.  466. 


STRUCTURAL  COSTS  87 

the  price  of  gas  in  New  York  City  from  $1.00  to  80  cents.  It  was 
admitted  that  the  city,  at  its  own  expense,  had  built  costly 
pavements  over  the  gas  mains  of  the  company,  and  that  the 
subsurface  of  the  streets  had  become  so  crowded  with  other 
structures  since  the  mains  were  laid,  as  to  increase  the  cost  of 
their  laying,  thus  making  the  cost  of  reproduction  So, 560,000. 00 
greater  than  the  original  book  cost,  yet  the  Special  Master  and 
the  Judge  of  the  Circuit  Court  expressly  recognized  and  allowed 
such  increased  value  which  in  appeal  was  later  approved  or  at 
least  not  objected  to,  by  the  U.  S.  Supreme  Court  in  determining 
the  value  on  which  a  fair  rate  of  return  should  be  based.  The 
exact  wording  of  the  Supreme  Court  in  the  gas  case  is  so  definite 
and  illuminating  as  to  the  time  of  valuation  and  increase  in  values 
allowable  that  we  quote  it. 

"And  we  concur  with  the  court  below  in  holding  that  the  value  of 
the  property  is  to  be  determined  as  of  the  time  when  the  inquiry  is 
made  regarding  the  rates.  If  the  property,  which  legally  enters  into 
the  consideration  of  the  question  of  rates,  has  increased  in  value  since 
it  was  acquired,  the  companj-  is  entitled  to  the  benefit  of  such  increase. 
This  is,  at  any  rate,  the  general  rule.  We  do  not  say  there  may  not 
possibly  be  an  exception  to  it,  where  the  property  may  have  increased 
so  enormously  in  value  as  to  render  a  rate  permitting  a  reasonable 
return  upon  such  increased  value  unjust  to  the  pubUc.  How  such 
facts  should  be  treated  is  not  a  question  now  before  us  as  this  case 
does  not  present  it.  We  refer  to  the  matter  only  for  the  purpose  of 
stating  that  the  decision  herein  does  not  prevent  an  inquiry  into  the 
question,  when,  if  ever,  it  should  be  necessarih'  presented."  ' 

Water  Power. — The  valuation  of  a  water  power  is  one  of  the 
most  complex  and  difficult  problems  in  appraisal  work.  The 
cost  of  the  dam,  building  and  machinery,  of  course,  does  not 
represent  the  total  value  of  a  developed  water  power.  Before 
any  installation  of  plant,  the  undeveloped  water  power  had  a 
dormant  value. 

The  determination  of  the  value  of  water  powers  has  been 
attempted  in  at  least  two  distinct  ways. 

(a)  Market  price, — that  is  the  price  that  might  be  paid  for 
power,  based  on  local  opinion,  market  quotations  or  future 
expectations.  In  Wisconsin,  testimony  adduced  before  the 
Railroad    Commission,    indicated    that    water    powers    in    that 

•  Wilcox  vs.  Consolidated  Gas  Co.  212  U.  S.  19. 


88  VALUATION  OF  PUBLIC  UTILITIES 

State  were  worth  about  $80  per  H.  P.,  on  the  basis  of  uniform 
power  throughout  the  year. 

(b)  Capitalization  of  an  amount  somewhat  less  than  the 
difference  between  the  sum  of  the  fixed  charges  and  operating 
expenses  of  the  hydraulic  plant,  compared  with  similar  costs  of  a 
steam  plant  located  at  the  market  to  be  supplied  from  the 
hydraulic  plant. 

The  capitalization  of  the  difference  in  the  cost  of  operating  a 
hydraulic  compared  with  a  steam  plant,  has  several  times  been 
considered  by  the  Railroad  Commission  of  Wisconsin.  The 
attitude  of  the  Commission  is  indicated,  for  example,  in  deter- 
mining the  price  to  be  paid  by  the  city  of  Kaukauna  for  the 
local  electric  plant,  which  included  a  lease  for  200  H.  P.  per- 
manent power,  and  100  H.  P.  revocable  power,  when  it  says: 

"In  considering  this  lease  the  company's  engineer  concluded  that 
the  same  has  a  value  for  the  200  H.  P.  for  permanent  power.  He 
figures  that  if  the  200  H.  P.  were  used  every  hour  in  the  year  at  the  rate 
of  3  1/2  lb.  of  coal  per  horse-power-hour  and  that  such  power  were 
generated  by  steam,  the  coal  cost  would  amount  to  $11,200.  The 
difference  between  this  cost  and  the  $2000  per  year,  if  the  water  cost 
$10  per  H.  P.  with  the  cost  of  operation  of  the  steam  auxiliary  when 
the  water  was  low  being  considered,  would  give  a  saving  of  approxi- 
mately $3460.  This  value,  capitalized  for  the  76  years  which  the 
lease  has  yet  to  run,  would  give  a  present  value  of  this  lease  of  $43,136. 

"The  city's  contention  as  to  the  value  of  this  lease  is  about  as  follows: 
The  fact  that  the  rent  is  to  be  readjusted  every  10  years  is  held  as  a  point 
which  makes  it  very  likely  that  each  year  the  adjustment  will  have  the 
tendency  to  bring  the  price  per  H.  P.  up  to  just  what  it  is  worth.  It 
maintains  that  for  the  present  10-year  period  the  price  per  H.  P.  will 
likely  be  $12  to  $12.50  and  that  there  is  no  way  of  telling  what  the 
price  may  be  for  the  next  10-year  period.  The  fact  that  the  buildings 
and  plant  equipment  of  the  electric  company  stand  on  leased  ground 
belonging  to  the  canal  company  is  also  considered  as  a  detrimental 
feature  of  the  contract.  The  attitude  of  the  canal  company  to  get 
full  value  out  of  the  water  power  is  considered  as  sufficient  reason  for 
saying  that  this  lease  is  really  of  no  value,  but  a  distinct  liability, 
inasmuch  as  back  rental  must  be  paid. 

"In  making  a  determination  as  to  the  value  of  the  lease  the  real 
point  would  seem  to  be:  Can  a  saving  in  operation  cost  of  this  utiUty 
be  made  by  using  the  water  power,  and,  if  so,  just  what  such  saving 
may  be?  If  we  consider  the  200  jDermanent  H.  P.  and  figure  a  load 
factor  of  50  per  cent.,  which  would  be  very  good  for  a  plant  of  this 
kind,  we  would  find  876,000  horse-power-hours  needed  in  the  operation 


STRUCTURAL  COSTS  89 

of  this  plant  for  a  year.  Assuming  then,  the  3  1/2  lb.  of  coal  per  horse- 
power-hour and  deducting  983,410  lb.  of  coal  which  the  company- 
report  shows  was  necessary  besides  the  water  power,  we  have  2,082,590 
lb.  of  coal  necessary  in  addition  to  what  was  used  in  the  operation  of 
the  plant.  Using  $4  per  ton  for  coal,  we  have  a  fuel  cost  of  $4165. 
The  water  power  cost,  assuming  $12  per  H.  P.  would  be  $2400,  would 
result  in  a  saving  of  $1765  by  using  the  200  H.  P.  of  water  power.  This 
being  a  saving  in  operation,  a  deduction  must  be  made  for  the  operating 
expense  of  taxes,  which  the  electric  company  must  pay  by  virtue  of  the 
lease.  The  taxes  on  the  water  power  amount  to  $500  at  least.  This 
leaves  a  saving  of  $1265  per  year.  In  connection  with  this  saving,  it 
should  be  remembered  that  the  present  10-year  period,  during  which 
time  the  $12  per  H.  P.  rent  would  seem  reasonable,  has  only  six  more 
years  to  run.  There  is  no  way  to  forecast  what  amount  maybe  asked 
for  and  agreed  upon  for  the  next  10-year  period.  It  would  seem  rea- 
sonable to  suppose  that  the  canal  company  will  bring  the  rent  up  to  just 
such  a  point  as  will  give  only  a  large  enough  margin  of  saving  to  keep 
the  electric  company  from  going  over  entirely  to  steam-power  gen- 
eration. What  this  point  may  be  is  not  known,  but  the  fact  remains 
that  an  arbitration  is  provided  for  in  10-year  periods,  and  considering 
the  disposition  of  the  canal  company  to  get  as  much  as  possible  for  this 
power,  the  future  value  of  this  lease  beyond  the  present  10-year  period 
is  certainly  speculative.  It  is  not  to  be  considered  that  any  arbitration 
board  would  act  unjustly  in  its  award.  We  must  assume  that  any  such 
board  will  fix  the  rental  at  a  fair  figure  regarding  what  the  value  of  such 
power  is  generally  rated  at  the  time  of  the  arbitration."^ 

The  market  price  obtainable  for  water  power  is  somewhat 
analogous  to  the  market  price  of  securities  of  any  utility  prop- 
erty. It  depends  ultimately  on  the  earning  power  and  in  states 
where  rate  control  is  possible,  may  lead  to  erroneous  conclu- 
sions. Where  no  rate  control  exists  other  than  that  arising 
through  competition,  the  value  of  a  water  power  is  clearly 
determined  by  the  cost  of  generating  power,  in  a  competitive 
market,  from  some  other  source  of  energy,  such  as  fuel. 

In  any  consideration  of  the  value  of  water  power,  it  is  im- 
portant to  differentiate  between  uniform  power  and  that  wdiich 
fluctuates,  depending  upon  the  rainfall,  or  other  conditions. 
Ordinarily  a  much  higher  price  per  H.  P.  for  uniform  power  is 
allowable  than  that  which  is  only  available  during  times  of  high 

*  In  redetermining  just  compensation  to  be  paid  Kankauna  Gas,  Electric 
Light  &  Power  Company.  Decision,  dated  Dec.  26,  1911.  Railroad  Com- 
mission of  Wisconsin. 


90  VALUATION  OF  PUBLIC  UTILITIES 

water,  although  occasionally  a  hydraulic  plant  supplementing 
the  supply  of  another  station  can  obtain  a  uniform  price  for  all 
of  its  output  regardless  of  variation  in  delivery. 

An  approximate  but  quick  way  of  ascertaining  whether  a 
water  power  is  worth  anything  or  not,  considered  on  the  basis  of 
earnings  and  ignoring  its  reproduction  value,  is  to  assume  figures 
with  regard  to  the  cost  of  its  operation  and  maintenance,  as 
shown,  by  way  of  illustration,  in  the  following  table: 

Labor  of  operation 2         per  cent. 

Oil,  waste  supplies  and  extras 1  1/2  per  cent. 

Repairs 11/2  per  cent. 

Taxes 1         per  cent. 

Depreciation 2         per  cent. 

Sinking  Fund 3         per  cent. 

Total 11  per  cent. 

If  the  cost  of  installation,  complete,  is  $100  per  H.  P.  and  the 
developed  energy  can  only  be  sold  for  $15  per  H.  P.  per  year,  it 
will  be  seen  that  the  water  power  really  has  little  value,  unless 
prospective,  because  the  return  on  the  investment  will  only 
amount  to  the  difference  between  the  sum  of  the  items  given  in 
the  table,  $11.00,  and  the  price  obtainable,  $15.00,  consequently 
no  financier,  with  his  eyes  open,  will  invest  in  as  uncertain  a 
project  as  a  water  power  which  will  only  bring  a  return  of  $4.00 
on  every  $100.00  put  in,  that  is,  4  per  cent. 


A 


CHAPTER  VI 

DEVELOPMENT  EXPENSES,  INTANGIBLE  EXPENSES,  NON-PHYS- 
ICAL COSTS,  OVERHEAD  EXPENSES 

General.— The  expenditures  made  for  the  actual  construction 
of  the  physical  plant  are  only  a  part  of  the  total  cost  of  any  com- 
pleted property. 

"There  can  be  no  true  test  other  than  the  physical  valuation,  and  to 
such  physical  valuation  there  may  be  added  certain  other  items."  ' 

The  present  line  of  division  between  the  costs  of  the  physical 
plant  and  those  of  the  non-physical  elements  of  a  utility  property 
is  a  more  or  less  variable  and  arbitrary  one.  There  exists  such  a 
considerable  difference  of  opinion  among  those  conversant  with 
the  subject  as  to  just  the  proper  class  in  which  these  non-physical 
costs  shall  be  grouped  that  no  generally  accepted  theory  has  yet 
been  established. 

As  has  been  indicated  in  the  preceding  pages,  good  practice 
inclines  to  the  inclusion,  with  material  property,  of  those  items  of 
expense  which  are  inherently  a  part  of  physical  plant  cost  and 
are  largely  regulated  thereby,  that  is,  such  expenses  as  manu- 
facturers' profit,  the  charges  of  sub-contractor,  or  general  con- 
tractor, engineers'  or  architects'  fees,  as  well  as  such  company 
superintendence,  clerk  hire,  office  and  legal  expenses  and  such 
other  incidentals  which,  as  a  part  of  the  administration  of  the 
work  of  construction,  may  logically  and  properly  be  included 
with  the  cost  of  the  physical  structure.  Those  other  items  of 
cost  which  are  incurred  through  originating  and  completing  the 
arrangements  necessary  but  preliminary  to  the  beginning  of 
construction,  such  as  legal  and  technical  expenses,  interest  on 
capital  which  is  used  in  preparing  the  entire  property  to  begin 
the  earning  of  an  income,  taxes,  both  those  in  connection  with 
the  organization  of  the  company,  and  those  accruing  during  the 
construction  period,  as  well  as  discounts  on  securities,  brokerage, 

'  Des  Moines  Water  Company  vs.  City  of  Des  Moines,  Decision  of  Judge 
McPherson,  dated  September  16,  1911,  U.  S.  Circuit  Court  for  Southern 
District  of  Iowa. 

91 


92  VALUATION  OF  PUBLIC  UTILITIES 

reasonable  promotion  profit,  also  working  capital,  and,  under 
certain  conditions,  superseded  plant,  explained  more  fully  in 
detail  in  the  following  pages,  may  be  properly  grouped  under 
the  head  of  "  Development  Expenses." 

Some  writers  and  experts  have  used  "development"  in  con- 
nection with  the  expenditures  made  in  developing  an  income, 
that  is,  after  the  physical  structure  and  commercial  organization 
are  prepared  to  begin  service,  it  will  require  appreciable  time  in 
which  to  put  the  business  on  a  paying  basis,  and  during  that 
period  the  deficits  accruing  have  been  capitalized  as  ''  Develop- 
ment Cost"  but  the  more  general  classification  of  such  items, 
namely  those  incurred  in  developing  income,  is  covered  by  one 
of  the  usual  definitions  of  ''Going  Value." 

The  line  of  demarkation  between  expenses  accruing  on  account 
of  capital  lying  idle  while  the  property  is  being  prepared  for 
service,  made  a  part  of  capitalization,  and  that  expense  charge 
accruing  later  on  account  of  failure  of  the  investment  to  earn  a 
fair  return,  either  capitalized  or  charged  to  operation,  is  at  the 
point  where  the  structural  plant  as  a  whole  or  its  several  parts 
or  units  are  completed,  ready  to  begin  operation  and  commence 
to  earn  an  income. 

"The  proper  period  for  the  capitalization  of  Development  Expenses 
ends  when  operation  actually  begins." 

"Securities  ought  not  to  be  issued  to  cover  operating  expenses,  fixed 
charges  or  dividends  after  that  time  (beginning  of  operation)  except 
possibly  in  a  most  unusual  case  when  such  jiroeedure  is  absolutely 
necessary  to  preserve  the  undertaking."* 

It  must  be  admitted,  however,  that  owing  to  the  prevailing 
lack  of  uniform  practice,  some  of  the  intangible  elements  grouped 
under  "Development  Expense"  have  been  included,  and  in 
certain  methods  of  estimating,  must  be  considered  a  part  of 
"Going  Value."  On  the  other  hand,  some  authorities  consider 
that  certain,  such  items  as  interest  during  early  operation,  should 
not  be  capitalized  at  all,  either  under  the  head  of  "Development 
Expenses"  or  "Going  Value,"  but  rather  paid  out  of  earnings, 
the  same  as  any  other  operating  expense. 

"But  it  ordinarily  happens,  during  the  first  few  years  of  operation, 
that  the  company  does  not  earn  a  fair  return.     How,  then,  are  the 

'  Opinion  dated  July  29,  1910,  denying  application  Third  Avenue  Railroad 
Company.     Public  Service  Commission  of  New  York,  First  District. 


EXPENSES  93 

investors  to  be  made  whole?  There  are  two  solutions:  one  is  to  capital- 
ize the  losses  or  deficiencies  below  a  fair  return,  and  all  the  other 

elements  which  are  said  to  be  included  in  'going-concern.' " 

"The  other  solution  is  to  charge  all  such  expenses  to  operation,  to 
attempt  to  make  no  fine-spun  distinctions,  and  then  to  jiermit  the 
company  to  charge  in  later  3'ears  rates  sufficient  to  offset  its  deficiencies 
below  a  fair  return  in  the  first  few  years.'" 

The  Public  Service  Commission  of  New  York,  First  District, 
has  used  the  term  "Development  Expenses"  in  its  printed 
opinions  and  decisions,  for  some  years.  It  will  be  seen  that  the 
items  covered  by  the  term  correspond  to  those  mentioned  by 
the  author: 

"There  are  certain  expenses  connected  with  every  undertaking 
which  are  not  represented  by  physical  property  but  which  must  be 
incurred  before  the  j^lant  is  operated.  These  relate  to  the  initial 
promotion  of  the  scheme  and  the  organization  of  the  company.  In- 
vestors must  be  interested,  lawyers  and  engineers  must  be  consulted, 
and  franchises  and  permits  must  be  secured.  Interest  and  taxes  during 
the  period  of  construction  must  be  paid,  and  as  there  are  no  earnings, 
they  must  be  included  as  part  of  the  cost  of  the  undertaking.  There 
are  also  other  expenses  connected  with  the  experimental  and  trial 
operation  of  machinery  and  the  adjustment  of  ^■arious  parts,  etc.,  which 
antedate  operation."^ 

"The  foregoing  items  of  valuation  do  not  include  any  allowance  for 
easements  or  for  other  real  estate  values  in  excess  of  the  assessed  valua- 
tion. Neither  do  they  make  any  allowance  for  franchise  A'alues  nor  for 
a  considerable  amount  of  development  expenses,  as,  for  example, 
interest  during  period  of  construction  on  capital  used  in  construction, 
reasonable  profits  of  promoting  the  enterprise,  preliminary  legal  ex- 
penses of  organization  and  other  legal  preliminaries,  cost  of  complying 
with  various  preliminarj'  requirements  of  law.  All  of  these  items 
would  be  absolutely  essential  disbursements  in  the  reproduction  of 
any  existing  railroad,  and  they  would  add  considerably  to  the  figures 
of  valuation  given  in  the  foregoing  estimate  if  proper  allowance  were 

made  for  them It  is  to  be  borne  in  mind  in  this  connection 

that  physical  assets  are  not  the  only  real  and  valuable  properties  of  a 
company  upon  which  it  is  entitled  to  a  fair  return.     There  are  numerous 

'  Opinion  and  order,  dated  June  23,  1911,  in  the  matter  of  the  gas  and 
electric  rates,  charged  by  the  Queensborough  Gas  and  Electric  Company. 
Public  Service  Commission  of  New  York,  First  District. 

^  "Opinion  and  Order  dated  June  23,  1911,  Public  Service  Commission  of 
New  York,  First  District,  in  the  matter  of  the  gas  and  electric  rates 
charged  by  the  Queensborough  Gas  and  Electric  Company. 


94  VALUATION  OF  PUBLIC  UTILITIES 

other  elements  which  may  be  properly  regarded  as  capital  charges  to 
be  considered."* 

In  the  Brooklyn  Borough  and  Kings  County  matter,  the 
Public  Service  Commission  of  New  York  added  over  23  per 
cent,  for  "preliminary  and  development  items,"  including 
working  capital,  to  the  present  value  to  obtain  the  grand  total. 
In  another  decision  relating  to  the  Kings  County  Company, 
the  same  Commission  added  16  per  cent,  to  the  net  cost  includ- 
ing real  estate  to  cover  Development  Expenses,  and  in  the 
Queensborough  Gas  and  Electric  Company  case,  over  22  per 
cent,  to  present  value  to  cover  Development  Expenses  and 
working  capital. 

The  Public  Service  Commission  of  New  York,  Second  Dis- 
trict, has  very  concisely  stated  its  views  with  regard  to  many 
of  the  items  included  in  Development  Expenses  in  their  opinion 
on  the  application  of  the  Rochester  Corning  Elmira  Traction 
Company,  for  authority  to  issue  securities  to  provide  funds 
for  a  proposed  electric  road.  After  giving  the  estimates  cover- 
ing the  cost  of  producing  the  physical  plant,  the  Commission 
■  says : 

"Although  the  foregoing  is  believed  to  be  as  nearly  a  correct  estimate 
of  the  actual  cost  of  the  road  as  can  be  made  in  the  absence  of  exact 
knowledge  as  to  quantities,  we  deem  it  wise  to  add  thereto  5  per  cent. 
for  any  unforeseen  contingencies,  or  an  aggregate  amount  of  $316,435. 
To  cover  the  cost  of  legal  expenses,  organization  tax,  tax  upon  stock  to 
be  issued,  the  expense  before  the  Board  of  Railroad  Commissioners  in 
procuring  a  certificate  of  public  convenience  and  a  necessity,  the 
expense  before  this  Commission  upon  this  proceeding,  the  expense  of 
marketing  the  securities  of  the  company,  engineering  and  other  details 
not  necessary  to  specify  with  particularly,  we  have  computed  the 
amounts  capable  of  reasonably  precise  computation  and  think  it  best 
upon  the  whole  to  allow  for  all  items  of  this  character  an  additional 
5  per  cent,  amounting  to  the  sum  of  $316,435.  We  have  also  allowed 
for  working  capital  the  sum  of  $100,000,  and  for  the  services  of  those 
engaged  in  organizing  the  enterprise  another  5  per  cent,  upon  the 
estimated  cost.  The  aggregate  of  these  several  percentages  is  the  sum 
of  $1,049,305,  which  with  the  estimated  cost,  makes  a  total  of 
$7,378,020." 

*  Case  No.  351.  Page  9.  Monheimer  vs.  Brooklyn  Union  Elevated  Com- 
pany, Brooklyn  Heights  Railroad  Company,  etc.  Opinion  and  Order  Public 
Service  Commission  of  New  York,  First  District. 


EXPENSES  95 

"This  is  in  brief  a  rough  sketch  of  the  process  observed  in  reaching 
the  allowance  of  capitalization  which  we  propose  to  make.  It  should 
be  noted  that  the  percentages  which  we  have  allowed  are  wholly  based 
upon  the  circumstances  of  this  case,  many  of  which  it  is  impracticable 
to  detail  with  any  degree  of  fullness  at  this  time.  It  is  to  be  understood 
that  none  of  these  allowances  are  to  be  regarded  as  binding  upon  the 
Commission  in  case  of  applications  of  other  companies.  It  has  not  been 
designed  to  estabhsh  any  precedent  in  the  determination  of  these 
amounts,  and  the  Commission  will  feel  itself  at  liberty  in  other  applica- 
tions of  like  character  to  proceed  absolutely  upon  the  circumstances  of 
each  case  and  fix  allowances  for  services  and  expenses  of  the  character 
of  those  under  discussion  upon  such  principles  and  for  such  reasons  as 
may  approve  themselves  at  that  time. 

"  It  should,  however,  be  understood  that  applicants  must  always  be 
prepared  to  give  evidence  of  services  rendered  and  expenses  incurred  to 
the  end  that  the  commission  may  be  prepared  to  make  such  allowance  in 
capitalization  as  the  facts  of  the  case  may  justify. 

"If  we  deduct  from  this  sum  84,000,000  for  the  amount  of  the  auth- 
orized capital  stock,  the  remainder  would  constitute  a  bond  issue  of 
$3,378,020.  Unquestionably  these  bonds  will  not  sell  at  par,  and  an 
allowance  should  be  made  for  the  discount  necessary  to  float  them  upon 
the  market.  No  proof  has  been  offered  as  to  the  amount  for  which 
they  can  be  sold.  We  are  unwilling  to  consent  to  their  being  put  upon 
the  market  at  less  than  85.  Making  the  proper  computations  for  selling 
them  at  this  figure,  and  also  allowing  for  interest  upon  the  bonds  for  one 
year  at  5  per  cent,  to  be  paid  from  the  proceeds,  a  total  issue  of  bonds 
to  the  amount  of  .14,207,914  would  be  necessary.  Making  the  author- 
ization for  bonds  $4,210,000  and  stock  issue  $4,000,000,  we  have  a  total 
issue  of  stock  and  bonds  of  $8,210,000.  The  interest  charge  at  5  per 
cent,  upon  these  bonds  would  be  $212,500  as  against  the  assumed 
charge  of  $216,000  hereinbefore  set  forth."  ^ 

Mr.  B.  J.  Arnold,  of  Chicago,  one  of  the  most  prominent  con- 
sulting engineers  engaged  in  appraisal  and  valuation  work,  in 
discussing  reproduction  values  in  relation  to  intangible  values, 
has  testified  that  in  addition  to  the  value  of  the  physical  equip- 
ment, there  are  intangible  values,  which  he  called  "  Develop- 
ment Expenses,"  and  covered  by  additional  allowances  to 
provide  for: 

"Legal  Expenses  in  connection  with: 

"PreHminary  promotion,  organization  and  incorporation  of  company, 

'  Application  Rochester  Corning  Elmira  Traction  Co.  Decision,  March 
30,  1908.     Public  Service  Commission,  New  York,  Second  District. 


96  VALUATION  OF  PUBLIC  UTILITIES 

consent  of  State  Commission,  propertj'  owners'  consent,  consents  of 
local  authorities,  consolidation  of  companies,  and  terminal  arrange- 
ments, also  for  trackage  right  of  way,  agreements  bridge  terminal 
arrangements,  and  leases  between  companies." 

"Technical  expenses  in  connection  with: 

"Preliminary  survey  and  location  of  line,  estimates  of  cost,  estimate 
of  earnings,  preparation  of  prospectus,  maps,  for  property  owners' 
consents  and  consents  of  local  authorities." 

"Promotion  expenses: 

'  Cost  of  organization  prior  to  actual  construction." 

"Profits  of  promotion  including  original  organization  and  consolida- 
tion, 5  per  cent,  to  10  per  cent,  on  $8,700,000." 

"Financial  expenses: 

"Discount  and  commi.s.sion  on  sale  of  securities  5  per  cent,  to  10 
per  cent,  upon  capitalization.  Interest  and  taxes  during  construction, 
3  per  cent,  to  6  per  cent,  on  the  approximate  value  of  the  physical 
property,  taking  that  interest  for  approximately  a  year's  time  as  a 
maximum,  and  for  six  months  as  a  minimum." 

"Permanent  right  of  way." 

"Property  owners'  consents,  bridge  charges." 

"Fill  on  Coney  Island  Avenue." 

"Change  of  grades  on  Coney  Island  Avenue.  Coney  Island  Avenue 
right  of  way." 

"Cost  of  obtaining  trackage  rights.  Bridge  arrangements  and 
exchange  of  power  arrangements." 

"Additional  sales  value." 

"Cost  of  acquiring  real  estate." 

"Equity  in  terminal  at  Coney  Island." 

"Real  estate  not  used  in  operation  of  road." 

"  Buildings  not  used  in  the  operation  of  the  road." 

"Working  capital."* 

The  Railroad  Commission  of  Wisconsin  has  not  divided  the 
non-physical  expenses,  to  be  added  to  the  cost  of  the  structural 
plant  in  ascertaining  the  total  value  of  property,  along  the 
same  lines  as  indicated  above.  With  the  physical  plant  has 
usually  been  included  on  allowance  of  12  per  cent,  for  engineer- 
ing and  supervision,  interest  during  construction,  contingencies, 
etc.,  with  a  separate  estimate  of  going  value  or  "earning  value," 
so  that  in  the  same  way  the  Commission  recognizes  the  necessity 

^Minutes  of  testimony,  Case  No.  1134,  September  15,  1909.  Monheimer 
vs.  Coney  Island  &  Brooklyn  Railroad  Company,  Public  Service  Commission 
of  New  York,  First  District. 


EXPENSES  97 

of  allowances  for  development  expenses  in  one  class  or  another. 
For  example,  in  discussing  corporation  accounts,  it  says: 

"These  accounts,  with  the  records  upon  which  they  are  based,  should 
show  the  cost  of  each  of  the  different  parts  of  the  plant,  the  cost  of 
engineering,  superintendence  and  management,  the  amount  that  was 
allowed  as  interest  on  the  capital  during  the  construction  period,  the 
amount,  if  any,  at  which  the  bonds  were  discounted,  the  basis  upon 
which  the  stock  was  issued,  the  promotion  expenses,  if  any,  the  basis 
upon  which  the  contracts  for  construction  were  let,  the  cost  of  the 
franchises  that  were  obtained,  and  all  other  items Con- 
tractors' profit  is  an  item  that  usually  enters  into  the  cost 

Interest  on  the  cost  during  the  period  of  construction  would  seem  to 
be  one  of  the  necessary  elements  that  should  be  included  in  the  total 

cost  of  the  plant The  fact  that  interest  on  the  capital 

used  must  be  paid  is  too  well  settled  to  be  questioned  here 

Whether  this  (discount  on  bonds)  is  a  legitimate  cost  to  be  included  in 
the  cost  of  construction  will  perhaps  depend  upon  the  circumstances  in 
each  particular  case.  If  the  utihty  is  needed,  and  the  capital  for  it  can 
be  had  on  no  better  terms,  then  it  is  difficult  to  say  on  what  grounds 
such  discounts  should  not  be  included  in  the  cost  of  the  plant.     To 

so  include  it  has  been  and  is  the  almost  universal  practice 

As  a  rule  is  it  not  safe  to  enter  upon  the  erection  of  works  of  this  character 
without  having  provided  for  efficient  supervision  of  the  same.  Such 
supervision  costs  money,  and  this  cost  ordinarily  is  a  proper  charge 

to  construction Owners  and  promotors  are  undoubtedly  as 

much  entitled  to  fair  compensation  for  legitimate  and  valuable  services, 

as  any  one  else In  the  construction  of  plants  of  this  kind, 

a  great  deal  of  capital  is  required,  and  this  cannot  be  had  without 
cost.  The  services  of  engineers  and  superintendents  must  also  be 
obtained,  and  this  is  combined  with  another  class  of  outlays.  In 
addition  to  this,  something  should  also  be  set  aside  for  insurance  and 
contingencies  of  various  kinds.  These  items  are  legitimate  outlays  in 
undertakings  of  this  character,  and  are  usually  placed  at  from  10  to 
IS  per  cent,  on  the  remaining  expenses  of  the  cost  of  construction.^ 
"The  element  of  cost,  by  reason  of  interest  during  construction,  is  one 
which  cannot  be  escaped.     It  is  present  to  some  extent,  no  matter 

what  the  method  of  financing  the  construction  may  be." 

"The  amount  of  the  working  capital  required  by  the  plant,  rather 
than  the  question  as  to  whether  something  should  be  allowed  for  such 
capital,  is  the  issue  raised  by  the  testimony."^ 

1  Hill  vs.  Antigo  Water  Co.  Decision  August  3,  1909,  Railroad  Commis- 
sion of  Wisconsin. 

*  State  Journal  Printing  Company  vs.  Madison  Gas  &  Electric  Company. 
Decision,  March  8,  1910.     Railroad  Commission  of  Wisconsin. 

7 


98  VALUATION  OF  PUBLIC  UTILITIES 

The  propriety,  necessity  and  legitimacy  of  making  appro- 
priate allowances  for  the  items  generally  grouped  as  Develop- 
ment Expenses,  in  valuing  property,  has  never  been  questioned 
by  properly  informed  individuals,  Commissions  or  Courts. 
Although  the  term  as  such,  may  never  have  been  used  judicially, 
frequent  decisions  expressly  recognize  and  justify  allowances 
being  made  for  these  items  of  expenditure. 

"Of  the  other  items,  those  for  organization  and  the  expense  of 
procuring  franchise  are  not  shown  by  the  testimony  to  have  been 
illegitimately  expended,  nor  considering  the  period  of  time  over  which 
the  various  items  were  expended,  and  the  different  organizations 
through  which  the  properties  went,  an  unreasonable  charge  for  that 
purpose. 

"The  discount  of  $22,800  upon  certain  bonds  sold  by  one  of  the 
constituent  companies,  was  a  reasonable  discount  for  the  negotiating 
of  bonds  of  that  character,  at  the  time  they  were  sold,  and  the  amount 
of  such  discount  represents  actual  cost  to  the  Company. 

"In  any  estimate  for  replacement  value,  allowance  should  be  made 

for  all   engineering   expenses,   miscellaneous  expense   and 

other  expense  accruing  during  the  construction  of  a  plant,  costing 
the  indicated  sum,  would  seem  to  be  reasonable  not  only  in  view  of 
his  testimony,  but  in  view  of  the  testimony  of  other  witnesses  in  the 
case. 

"The  figures  referred  to,  contained  no  allowance  for  interest  upon 
the  amount  invested,  and  accident  insurance,  during  the  construction 
period,  which  should  be  necessary  if  a  plant  of  this  kind,  description, 
value  and  price  were  to  be  built.  Such  interest  charges  are  obviously 
proper  to  be  added."' 

In  the  hearings  before  the  Public  Service  Commission  of 
New  York,  First  District,  in  the  Coney  Island  "Ten  Cent  fare 
case,"-  Mr.  Frank  R.  Ford,  of  Ford,  Bacon  &  Davis,  introduced 
during  his  testimony  a  very  exhaustive  analysis  of  the  items  that, 
in  the  case  of  a  New  York  Company,  must  be  considered  in 
making  up  an  estimate  of  the  expenses  covering  the  period  pre- 
vious to  beginning  construction.  Mr.  Ford's  exhibit  is  so  com- 
plete and  will  be  of  such  service  as  a  guide  to  anyone  interested 
in  considering  Development  Expenses  that  the  table  in  full  is 
here  reproduced. 

'  Report  of  special  Master,  Circuit  Court  of  the  United  States,  Southern 
District  of  Ohio.     Columbus  Railway  &  Light  Co.  vs.  City  of  Columbus. 

^  Case  No.  1134,  J.  Monheimer  vs.  Coney  Island  &  Brooklyn  Railroad 
Company.     Public  Service  Commission  for  the  First  District,  New  York. 


EXPENSES 


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110  VALUATION  OF  PUBLIC  UTILITIES 

Interest. — Interest  accruing  on  idle  capital,  represented  either 
by  cash  or  plant,  during  the  preparation  of  a  public  utility- 
property  for  service,  has  been  repeatedly  allowed  by  Public 
Service  Commissions,  and  affirmed  by  the  various  courts,  includ- 
ing the  Supreme  Court,  as  a  proper  expenditure  for  capitaliza- 
tion. The  only  debatable  questions,  in  this  connection,  are  the 
fair  rate  of  interest  to  be  allowed  and  the  proper  length  of  time 
during  which  the  interest  accrues. 

"And  a  fair  rate,  usually  the  prevailing  rate  of  interest,  upon  the 
money  invested  in  the  plant  during  the  construction,  and  before 
completion,  is  as  much  a  part  of  the  cost  of  construction  as  is  the 
money  itself  which  is  expended  for  material  and  labor. "^ 

The  Supreme  Court  of  Oklahoma,  in  a  recent  decision,  says 
regarding  interest : 

"The  Commission  refused  to  allow  it  because  it  did  not  consider  it 
a  proper  element  of  reproductive  value. 

"Counsel  for  the  Commission,  however,  at  the  oral  argument  before 
this  court,  conceded,  and  we  think  properly,  that  there  was  no  ground 

for  refusing  its  allowance No  case  has  been  cited  and  in 

our  investigation  we  found  no  case  involving  this  question,  where  a 
reasonable  amount  has  not  been  considered  and  allowed  for  loss  of 
interest  during  construction  as  part  of  the  cost  of  construction."^ 

The  interest  properly  allowable  on  property  held  as  invest- 
ment during  the  period  in  which  the  property  is  being  com- 
pleted must  not  be  confused  with  the  interest  allowed  as  a 
return  on  investment,  but  not  earned  during  the  early  history 
of  a  corporation,  which  latter  amount  is  sometimes  capitalized 
for  example,  as  going  value,  or  deducted  from  income  as  a  part 
of  operating  expense,  where  the  earnings  are  sufficiently  gen- 
erous, at  a  later  period,  to  permit  writing  off  these  early  losses 
without  injustice  to  the  investors.  At  first  thought,  there  may 
seem  to  be  a  duplication  of  interest  in  the  above  allowances, 
but  the  confusion  arises  from  the  use  of  the  same  term  "inter- 
est" which  really  has  two  meanings,  one  relating  to  the  interest 
involved  in  preparing  the  property  for  operation  and  therefore 
properly  a  part  of  construction  expense  the  same  as  labor  or 

^  Bruns'nick  and  Topsham  Water  District  vs.  Maine  Water  Company. 
99  Maine,  371. 

-Pioneer  Telephone  &  Telegraph  Company  vs.  Westenhaven.  118  Pa- 
cific 354. 


EXPENSES  -  111 

equipment;  the  other  relating  to  profit  which  the  investor  is 
entitled  to  earn  upon  his  investment,  which  may  or  may  not  be 
charged  to  operation. 

In  making  estimates  for  the  proper  allowance  of  interest 
during  the  construction  period,- it  makes  little  difference  whether 
it  is  assumed  money  has  been  put  into  the  property  at  one  time, 
when  the  plant  was  first  constructed,  or  whether  money  has 
been  added  from  time  to  time  as  the  original  plant  has  been 
enlarged.  In  either  case  interest  during  construction  must  be 
provided  from  some  source.  Similarly  allowances  must  be  made 
to  cover  unearned  interest,  that  is,  ''unfair"  return,  during 
the  early  days  of  operation  of  the  original  plant  or  of  added 
parts,  as  it  would  be  a  very  unusual  circumstance  to  find  a 
utility  property  which  began  to  earn  a  fair  return  as  soon  as 
the  entire  plant  or  any  completed  part  was  put  in  service. 

The  total  amount  of  interest  allowable,  up  to  the  time  of 
beginning  operation,  is  very  often  taken  as  the  sum  of  two 
items  figured  separately  upon: 

(a)  The  cost  of  the  physical  plant,  including  the  items  of 
contractors'  profit,  engineering,  incidentals,  etc. 

(b)  The  cost  of  expenditures  made  in  cash  under  the  head  of 
development  expenses. 

The  rate  pi  interest  per  annum  proper  to  allow  for  moneys 
advanced  to  cover  necessary  expenditures,  during  the  develop- 
ment and  construction  period,  will  vary  in  different  parts  of 
the  country,  being  determined  from  consideration  of  what 
money  can  earn  from  similar  enterprises  under  like  conditions 
and  risk.  In  New  York  City,  for  example,  6  per  cent,  would 
not  be  considered  an  unreasonable  allowance  for  estimating 
such  interest,  whereas  in  the  Western  States  7  or  8  per  cent. 
would  be  equally  as  reasonable  and  in  South  American  or  other 
distant  countries  a  still  higher  rate  would  be  fair. 

As  equally  important  as  the  rate,  in  fixing  the  proper  amount 
of  interest  allowable,  is  the  period  of  time  over  which  it  is  figured. 
The  length  of  time  estimated,  depends  upon  the  rate  of  con- 
struction assumed  which  is  of  course  governed  by  the  complexity 
of  conditions  under  which  the  corporation  began  operation, 
the  size  and  peculiarities  of  the  plant,  climatic  conditions, 
facilities  for  the  work,  freedom  from  labor  troubles  and  similar 
allied  circumstances.  The  period  of  plant  construction  really 
extends  from  the  time  the  first  real  estate  is  purchased  until 


112  VALUATION  OF  PUBLIC  UTILITIES 

the  property  is  in  condition  to  begin  delivering  output.  Unless 
construction  work  is  being  done  in  large  centers  of  population 
or  is  spread  over  a  considerable  territory,  it  cannot  usually  be 
advanced  efficiently  and  economically  at  a  rate  greater  than 
will  be  covered  by  the  expenditure  of  about  a  million  dollars 
a  year  for  labor  and  ordinary  material;  of  course  the  installation 
of  large  and  expensive  units  of  machinery  or  equipment  would 
increase  the  investment  rate.  At  the  time  the  general  electri- 
fication of  surface  roads  was  being  done  in  New  York  City,  and 
the  work  being  pushed  as  rapidly  as  practicable,  records  indicate 
that  reconstruction  work  did  not  exceed  about  24  miles  of  single 
track  a  year  as  a  maximum,  and  similiar  work  in  Chicago  has 
only  aggregated  a  little  over  $10,000,000  a  year  including  equip- 
ment, etc. 

Where  the  period  of  plant  construction  is  estimated  to  be 
fairly  brief,  as  for  example,  less  than  a  year,  it  is  usually  as- 
sumed that  the  total  amount  of  money  required  will  be  pro- 
vided in  advance  of  beginning  construction  and  therefore  the 
full  interest  rate  for  the  full  time  of  construction  may  be  allowed 
thereon.  Where  the  period  of  construction  extends  over  several 
years  as  in  the  case  of  large  properties  which  cannot  be  built  in  a 
brief  space  of  time  without  undue  expense,  it  is  quite  customary 
to  consider  that  all  of  the  money  is  not  required  in  advance,  and 
to  approximate  conditions  by  considering  that  half  of  the  money 
is  required  all  of  the  time,  or  all  of  the  money,  half  the  time, 
so  that  the  interest  allowed  is  figured  from  the  rate  determined 
based  upon  half  the  funds  provided  for  the  whole  time,  or  half 
the  rate  upon  the  total  funds. 

As  an  offset  to  the  charge  of  interest  during  construction 
there  may  properly  be  considered  what  amount  of  interest  the 
funds  held  waiting  investment  can  earn.  Trust  Companies  will 
pay  a  low  rate  of  interest,  2  per  cent,  a  year  is  quite  customary, 
on  average  balances  kept  on  deposit  against  a  checking  account. 
Readily  convertible  capital  may  be  kept  in  the  form  of  certifi- 
cates of  deposit  on  which  a  still  higher  rate  may  be  earned.  As 
the  amount  of  money  used  during  a  year  for  construction  pur- 
poses may  be  estimated,  the  average  balance  will  be  half  of  the 
amount,  assuming  withdrawals  are  made  at  uniform  rate,  con- 
sequently the  amount  on  which  interest  may  properly  be  figured 
whether  for  charges  against  construction  or  as  a  credit  arising 
from  earnings  from  bank  deposits,  may  be  fairly  based  on  one- 


EXPENSES  113 

half  the  total  expenditure  for  the  year  or  what  amounts  to  the 
same  thing,  the  total  expenditure  at  one-half  the  rate. 

A  very  usual  rate  of  interest  allowed,  as  fair  and  proper,  has 
been  6  per  cent.  In  some  few  instances  the  total  amount  of 
interest  accumulating  during  the  period  of  construction  has 
been  based  on  the  amount  of  the  investment  made  from  month 
to  month,  but  in  most  instances  records  of  the  progress  of  con- 
struction are  not  available  and  an  approximate  method  must 
be  used. 

The  New  York  Public  Service  Commission,  Second  District,^ 
allowed  5  per  cent,  for  two  years,  or  a  total  of  10  per  cent,  of 
construction  cost  for  interest  during  construction.  The  Com- 
mission of  the  First  District  of  the  same  State  usually  allows 
6  per  cent,  as  the  proper  rate  at  which  to  figure  interest.  The 
Traction  Valuation  Commission  of  Chicago  allowed  5  per  cent, 
for  "legal  expense,  carrying  charges  and  contingencies,"  added 
to  the  value  of  the  physical  property  which  usually  included 
15  per  cent,  for  engineering  contingencies,  etc.  The  Public 
Service  Commission  of  St.  Louis,  in  the  Union  Company  Case, 
allowed  a  little  over  13  per  cent,  of  the  total  cost  of  construc- 
tion expenditures,  which  includes  real  estate,  incidentals  and 
contingencies,  contractors'  profit  and  engineering.  The  Rail- 
road Commission  of  the  State  of  Washington  has  allowed  7.5 
per  cent,  as  the  total  interest  oh  the  cost  of  the  physical  property 
of  the  Northern  Pacific  Railroad,  not  including  real  estate  or 
stores.  In  the  Puget  Sound  Electric  Railway  decision,  this  same 
Commission  allowed  7.5  per  cent,  upon  the  cost  of  right  of  way, 
and  3  3/4  per  cent,  upon  construction  and  equipment  items,  to 
cover  interest  during  construction.  In  the  appraisal  of  the  Michi- 
gan Railroads,  there  was  allowed  3  per  cent,  for  interest,  on  the 
entire  cost  of  construction  and  equipment.  The  Supreme  Court 
in  the  Consolidated  Gas  Case,  upheld  the  Master's  allowance 
of  a  total  of  5  per  cent,  on  the  value  of  the  entire  plant  to  cover 
interest.  The  Circuit  Court  of  Ohio  in  the  Columbus  Case, 
allowed  about  3  per  cent,  of  the  gross  replacement  valuation 
to  cover  "interest  and  insurance"  assuming  that  the  plant 
would  be  constructed  within  one  j^ear.  The  Railroad  Commis- 
sion of  Wisconsin  has  uniformly  adopted  the  rate  of  6  per  cent, 
per  annum,  for  interest  during  construction,  but  apparently 
has  allowed  nothing  more  than  a  total  of  4  per  cent,  upon  con- 

*  Buffalo,  Rochester  &  Eastern,  Vol.  I,  page  617,  decided  March  28,  1911. 


114  VALUATION  OF  PUBLIC  UTILITIES 

struction  expense,  relatively  small  plants  being  involved  in  its 
considerations.  This  Commission's  views,  on  the  subject  of 
rate  of  interest  allowable  and  period  of  construction  considered 
proper,  are  interesting. 

"ResiJondent  claimed  that  interest  during  construction  should  be 
computed  at  the  rate  of  6  per  cent.  That  interest  for  such  purpose 
is  a  proper  item  of  value  is  indisputable.  Whore  the  plant  construction 
is  financed  by  borrowing,  the  use  of  such  money  must  be  paid  for  in 
form  of  interest.  Where  the  corporation  finances  itself  and  no  money 
is  borrowed,  an  interest  charge  is  nevertheless  incurred  for  the  money 
thus  occupied  during  construction  is  entitled  to  current  interest  for  the 
period  so  engaged.  The  amount  to  be  allowed  for  the  purpose  of 
valuation  from  a  theoretical  standpoint  at  least  should  be  at  the 
current  rate  for  the  money  from  the  time  when  financing  must  be 
arranged,  directly  preceding  the  beginning  of  construction,  until  the 
completion  of  the  plant.  It  is  not  difficult  to  conceive  of  conditions 
under  which  the  interest  as  so  computed  would  be  a  very  large  item, 
since  organization  and  franchise  expenses  and  land  purchases  may  be 
long  in  advance  of  actual  construction 

"Consideration  must  also  be  paid  to  the  fact  that  the  average  open 
building  season  during  which  construction  can  be  carried  on  is  not  in 
excess  of  six  months  and  further  that  a  small  plant  can  be  constructed 

during  this  period From  all  facts  bearing  on  this  case  a 

fair  allowance  of  interest  during  the  construction  period  of  the  plant 
should  not  exceed  4  per  cent "^ 

"The  cost  of  interest  during  construction,  was  the  subject  of  much 
testimony.  The  staff  of  the  Commission  used  3  per  cent,  under  the 
assumption  of  one-year  construction,  but  changed  it  to  4  per  cent,  be- 
cause it  was  estimated  that  the  construction  might  require  more  than 

one  open   season It  would   seem  that  the  interest  during 

construction,  correctly  allowable  in  a  valuation  under  ordinary  con- 
ditions, would  be  interest  at  the  current  rate  on  the  cost  of  each  part 

of  the  plant  during  its  construction From  the  time  an 

investment  for  construction  is  made,  until  the  completion  of  the  entire 
plant,  enables  that  investment  to  become  active  as  an  integral  part 
of  a  working  whole,  there  is  the  element  of  interest  for  that  investment 
is  necessarily  involved  and  is  necessarily  idle  until  the  completion  of 
the  plant  to  a  working  point.  The  fact  of  interest,  like  the  fact  of  de- 
preciation, is  present  no  matter  what  method  be  employed  for  the 
financing  of  it.  This  is  as  true  when  the  money  is  furnished  by  the 
owners  as  when  it  is  borrowed  by  them.  The  theory  upon  which  such 
interest  rests  is  sound  and  remains  so  even  in  isolated  cases  where  the 

'  City  of  Ripen  vs.  Ripen  Water  Ce.  Decision  ef  March  28,  1910,  p.  14. 
Railroad  Commission  of  Wisconsin. 


EXPENSES  115 

investors  may  decide  to  charge  no  interest,  and  choose  to  donate  the 
same  to  the  consumers  in  the  way  of  lower  charges  for  the  services 
•rendered.  Even  if  the  Company  let  a  contract  for  the  complete  con- 
struction of  a  plant  to  be  paid  for  in  no  part  until  wholly  completed  to 
the  operating  point,  interest  cost  would  come  in  as  a  part  of  the  con- 
tract price,  even  though  not  expressly  set  forth.  In  that  case  the  con- 
tractor would  have  to  ask  a  higher  price  to  cover  the  interest  cost. 

In  the  tentative  valuation,  the  engineer  of  the  Commission 

allowed  2  per  cent,  for  various  items  including  contingencies,  omissions, 
liability  for  casualties,  legal  and  organization  expenses,  etc.,  but  in  the 
revision  allowed  3  per  cent,  on  this  account."' 

Taxes. — "Taxes  are  as  sure  as  death."  They  must  be  paid 
on  real  estate  from  the  time  of  purchase,  usually  months  or 
years  before  the  beginning  of  construction  work,  also  on  per- 
sonal property  from  the  time  of  its  installation,  always  a  con- 
siderable period  before  such  property  can  be  used  in  service. 
Special  taxes  such  as  franchise,  school,  or  improvements  must 
similarly  be  carried  until  operation  is  begun,  and  usually  for  a 
considerable  period  thereafter,  until  income  from  operation  is 
available  for  such  expenses,  by  drawing  on  the  funds  provided 
for  the  completion  of  the  entire  property.  Under  ordinary 
circumstances  there  would  seem  to  be  no  other  convenient  and 
legitimate  way  of  providing  for  these  expenditures,  up  to  the 
time  they  can  be  paid  as  a  part  of  regular  operating  expense, 
except  to  permit  their  capitalization. 

"Mr.  Floy  estimates  taxes  at  1/2  of  1  per  cent.  This  amount  in- 
cludes apparently  every  kind  of  tax  from  capital  stock  tax  to  franchise 
tax.  It  does  not  seem  to  be  unreasonable,  and  except  so  far  as  it  in- 
cludes taxes  paid  in  connection  with  the  corporate  organization  of  the 
old  company,  it  should  be  allowed."^ 

"When  the  construction  period  ends  interest  and  taxes  may  no 
longer  be  charged  to  construction  cost.  They  then  become  charges 
against  income  and  should  be  paid  out  of  operating  income."^ 

From  the  foregoing  quotations  and  others  that  could  be  cited 
it  will  be  seen  that  taxes  accruing,  at  least  up  to  the  time  of 

^  State  Journal  Printing  Company  vs.  Madison  Gas  &  Electric  Company. 
Decision,  March  8,  1910.     Railroad  Commission  of  Wisconsin. 

2  Opinion  disapproving  plan  of  reorganization.  Third  Avenue  Railroad 
Company,  dated  July  29,  1910.  Public  Service  Commission  of  New  York, 
First  District. 

^  Case  No.  1273  Mayhew  vs.  Kings  County  Lighting  Company  decided 
October  20,  1911.     Public  Service  Commission,  New  York,  First  District. 


116  VALUATION  OF  PUBLIC  UTILITIES 

beginning  operation,  are  recognized  as  much  a  necessar}'  part  of 
cost  of  construction  as  is  the  physical  property  itself.  Knowing 
the  local  rate  of  taxation,  capital  stock  tax,  mortgage  tax,  etc.,  the 
amount  of  taxes  properly  allowable  in  any  given  case  may  usually 
be  estimated  very  closely  in  figuring  the  cost  of  reproduction. 

Insurance. — Like  taxes  and  interest,  insurance  is  a  necessary 
part  of  the  total  cost  of  completing  a  propert}-  and  practically 
all  authorities  would  agree  that  such  expenditure  may  properly 
be  capitalized,  certainh'  up  to  the  time  of  beginning  operation. 
The  item  of  insurance,  including  fire,  casualty,  title  to  property 
and  other  insurance,  will  usualh"  be  found  to  aggregate  a  very 
appreciable  percentage  of  structural  cost.  For  example,  acci- 
dent insurance,  protecting  a  corporation  laying  tracks  in  the 
streets  of  New  York  City,  amounts  to  3/4  of  1  per  cent,  for 
employees  and  3/4  of  1  per  cent,  for  the  public  or  a  total  of 
1.5  per  cent,  of  the  labor  payrolls  of  the  work  involved.  Usualh^ 
estimates  can  quite  accurately  be  made,  dei^ending  upon  local 
conditions  and  the  property  being  reproduced,  but  will  seldom 
be  found  to  amount  to  less  than  1/2  of  1  per  cent,  and  possibly 
two  or  three  times  that  amount,  based  on  the  total  cost  of  the 
physical  property.  Public  authorities  have  recognized  the  legiti- 
macy of  proper  allowances  for  insurance,  the  Wisconsin  Com- 
mission including  it  with  the  percentage  allotted  to  legal  and 
organization  expenses. 

Legal  and  Organization  Expenses. — In  order  that  any  cor- 
poration, particularly  a  utility,  may  be  properly  and  safely 
organized,  and  put  on  a  sound  basis  for  successful  operation, 
conservative  and  reliable  legal  advice  must  be  had  more  or  less 
continually.  While  the  best  attorneys,  like  the  best  engineers, 
may  make  apparently  large  charges,  such  high  class  service 
usually  saves  utility  errors  and  omissions  which,  in  the  end, 
means  saving  both  of  investment  and  earnings.  In  valuing 
property  that  has  been  wisely  guarded  and  legally  secured, 
reasonable,  or  what  some  may  consider  even  generous  allowance, 
must  be  made  for  legal  expenses.  Such  allowance,  in  principle, 
has  always  been  recognized  by  public  authorities  and  courts  so 
that  the  only  question  has  been  one  of  amount.  It  is  of  course 
impossible  to  fix  a  definite  amount  that  should  be  allowed  for  all 
cases  and  it  is  even  impossible  to  determine  a  uniform  percentage, 
based  on  the  costs  of  the  remaining  property,  as  proper  for  legal 
and  organization  expenses,  because  the  services  performed  vary 


EXPENSES  117 

in  amount,  time  and  value  depending  uj^on  the  particular  j^rop- 
erty  and  conditions  under  consideration. 

The  Wisconsin  Commission  allows  from  2  to  3  per  cent,  to  cover 
"legal  work,  organization,  casualty  insurance,  omissions  and 
contingencies";  an  amount  which  under  ordinary  city  conditions 
would  be  insufficient  to  cover  all  of  the  items  specified,  but  which 
might  apply  to  small  towns  in  Wisconsin.  In  the  appraisal  of 
the  steam  railroads  of  Michigan,  1/2  per  cent,  was  allowed  on 
all  the  property,  except  rolling  stock,  stores  and  supplies  to  cover 
"Legal  Expenses."  Similarly  in  the  valuation  of  the  railroads 
of  Minnesota,  4  1/2  per  cent.,  was  allowed  for  "Engineering, 
Superintendence  and  Legal  Expenses,"  as  a  group.  The  Com- 
mission of  the  state  of  Washington,  in  the  Puget  Sound  case 
allowed  1  per  cent,  for  "  Legal  and  General  Expenses,"  based  on 
the  value  of  the  physical  property  not  including  the  real 
estate,  rolling  stock  or  stores.  The  Public  Service  Commission 
of  New  York,  Second  District,  allowed  5  per  cent,  in  the 
Rochester  Corning  Elmira  Traction  Company  decision,  for  "legal 
expenses,  organization  tax,  tax  upon  stock,  expenses  before 
commissions,  also  marketing  securities,  engineering  and  other 
details."  The  Commission  of  the  First  District  of  New  York 
has  been  accustomed  to  group  legal  expenses  with  other  items, 
usually  fixing  a  lump  sum  as  proper  allowance  for  any  given 
company  under  consideration;  but  in  one  case  the  Commission 
says: 

"  When  one  comes  to  development  charges,  there  is  less  uniformity  of 
practice.  Ordinarily  these  include  interest  and  taxes  during  construc- 
tion, preliminary  legal  expenses,  organization  expenses,  fees  to  state 
and  local  bodies,  cost  of  obtaining  consents,  etc.  Opinions  differ  as  to 
the  proper  amount  to  be  allowed,  but  in  the  cases  that  have  been  de- 
cided by  the  courts  and  administrative  bodies,  the  figures  generally 
vary  from  8  to  15  per  cent,  unless  the  company  is  able  to  show  the  ex- 
act amount  spent." ' 

The  Public  Service  Commission  of  St.  Louis  in  the  Union  Com- 
pany case,  allowed  1  per  cent,  on  the  net  cost  of  construction, 
not  including  real  estate  for  the  "Expenses  of  Organization," 
which  included  legal  expense. 

While  it  will  be  seen  from  the  preceding  that  no  definite  and 

'Case  No.  351.  Monheimer  vs.  Brooklyn  Union  Elevated  Railroad  and 
others.  Decided  March  8,  1910.  Public  Service  Commission  of  New  York, 
First  District. 


118  VALUATION  OF  PUBLIC  UTILITIES 

uniform  amount  or  percentage  can  be  agreed  upon  as  always 
applicable,  an  allowance  of  1  per  cent,  more  or  less,  for  legal  and 
organization,  in  development  expenses,  would  not  ordinarily 
seem  unfair. 

Cost  of  Financing. — ^There  prevails  some  opinion  to  the  effect 
that  it  is  improper  to  capitalize  the  difference  between  the  par 
value  and  the  cash  price  received  for  securities,  the  costs  of 
brokerage,  commissions,  discounts  or  other  expenditures  or 
compensations,  paid  for  obtaining  the  money  that  must  be  pro- 
vided for  the  construction  of  a  public  utilitj'.  In  view  of  the 
fact  that  financing  is  just  as  necessar}'  and  essential  a  part  of 
the  total  expense  of  installing  the  physical  plant  or  putting  the 
property  in  operation,  as  is  the  cost  of  the  structures  themselves, 
there  would  seem  to  be  no  reasonable  objection  to  such  cost 
being  capitalized,  and  Commissions  and  Courts  have  so  held. 

The  Wisconsin  Commission  has  made  an  allowance  for  the 
cost  of  financing  both  in  condemnation  and  rate  cases. 

"The  Plant  in  question  here,  for  instance,  was  built  by  borrowed 
money  or  by  the  sale  of  securities  which  not  only  bear  interest  at  6  per 
cent,  from  the  time  they  were  issued,  but  which  also  had  to  be  discounted 
at  not  less  than  8  per  cent,  besides.  In  other  words,  they  brought  8 
per  cent,  less  than  par  value  in  the  money  markets.  If  the  plant  was 
needed  and  these  were  the  best  terms  upon  which  the  capital  for  its 
construction  could  be  obtained,  it  is  certainly  difficult  to  see  what  other 
disposition  can  be  made  of  these  charges  than  to  include  them  in  the 
cost  of  the  plant,  at  least  until  they  can  be  written  off  from  earnings, 
if  this  course  should  be  found  to  be  advisable.  For  it  is  clear  that  no 
private  party  would  enter  a  business  of  this  kind  if  they  had  to  foot  such 
losses  out  of  their  own  pockets.  Such  interests  and  discounts,  there- 
fore, often  constitute  a  part  of  the  price  upon  which  the  consumers  must 
pay  interest  if  they  desire  the  conveniences  that  are  offered  by  the  util- 
ities, because  these  are  usually  the  best  terms  upon  which  such  utihties 
can  be  had.  These  facts  indicate  quite  clearly  that  the  amount  for 
which  interest  or  discount  that  it  may  become  necessary  to  include  in 
the  construction  account,  is  a  question  that  depends  upon  the  facts 
in  each  particular  case,  and  that  it  is  a  matter  that  cannot  always  be 
determined  in  advance."  *  *  *  * 

"It  is  difficult  to  say  on  what  grounds  such  discounts  (on  bonds) 
should  not  be  included  in  the  cost  of  the  plant.  To  so  include  it,  has 
been  and  is  the  almost  universal  practice."^ 

*  Hill  vs.  Antigo  Water  Company.  Decision,  August  3,  1909.  Railroad 
Commission  of  Wisconsin. 


EXPENSES  119 

"The  amount  of  $10,500.00  as  discount  on  bonds  would  seem  to  be 
properl}^  includible  in  the  estimate  of  original  cost  of  construction."^ 

"To  pay  expenses  of  the  sale  of  the  bonds  hereby  authorized  and  to 
make  up  the  discount  or  deficiency,  if  any,  in  the  amount  realized  from 
sale  to  net  not  less  than  SO  per  cent,  of  par  of  the  bonds  sold  for  pur- 
poses specified  in  the  sub-divisions  (1)  and  (2)  and  to  be  applied  pro  rata 

for  the   purposes  therein  stated  $97,908.00." "That   the 

discount  and  expenses  in  connection  with  the  sale  of  any  bonds 
authorized  to  be  issued  under  this  order  shall  be  amortized  out  of 
the  income  of  the  comj^any  before  January  1,  1955."' 

"The  discount was  a  reasonable  discount  for  the  nego- 
tiating of  bonds  of  that  character,  at  the  time  they  were  sold  and  the 
amount  of  such  discount  represents  actual  cost  to  the  company."^ 

Aside  from  the  argument  that  capitalization  should  equal  the 
value  of  physical  property  there  would  seem  to  be  no  particular 
or  logical  reason  why  the  cost  of  financing  should  be  hurriedly 
amortized.  Undoubtedly  it  is  advisable  and  necessary  to  begin 
writing  off  all  costs  of  financing  promptly  and  to  continue  to  do 
so  uniformly  during  the  life  of  the  bonds,  so  that  similar  ex- 
penses may  be  allowed  when  it  comes  time  for  new  financing, 
and  rates  should  be  made  high  enough  to  permit  this  amortization. 
On  the  other  hand,  public  utility  corporations  cannot,  except  in 
the  rarest  cases,  make  earnings  in  the  first  few  years,  sufficient 
to  permit  the  writing-off  of  these  costs  as  a  part  of  operating 
expense,  without  either  making  such  abnormally  high  rates  as 
to  retard  the  growth  of  business  and  place  an  unfair  burden  on 
the  early  customers  or  else  deprive  the  investors  of  a  fair  and 
proper  return  on  their  investment. 

The  bond  and  brokerage  houses,  the  usual  medium  through 
which  an  issue  of  securities  is  sold,  will  ordinarily  charge  a  cash 
commission  in  addition  to  insisting  upon  having  the  bonds  at  a 
discount.  This  charge  which  is  made  to  cover  their  expenses, 
advertising  and  some  profit  for  their  services  in  connection  with 
the  sale  of  these  securities  will  vary  from  a  minimum  usually 

'  In  the  matter  of  the  Fon  du  Lac  Water  Company  decided  August  19, 
1910.     Railroad  Commission  of  Wisconsin. 

2  Case  No.  420.  In  the  matter  of  the  Coney  Island  and  Brooklyn  Railroad 
Company,  order  authorizing  issue  of  bonds,  July  29,  1910,  Public  Service 
Commission  of  New  York,  First  District. 

^  Report  of  special  master.  Circuit  Court  of  the  U.  S.  Southern  District 
of  Ohio,  page  28.  Columbus  Railway  and  Light  Company  vs.  City  of 
Columbus. 


120  VALUATION  OF  PUBLIC  UTILITIES 

not  less  than  2^  per  cent,  up  to  5  or  10  per  cent,  depending 
upon  the  state  of  the  financial  market  and  the  credit  of  the  cor- 
poration desiring  to  place  the  bonds. 

Moreover,  in  enterprises  newly  starting,  the  financiers  often 
require  a  bonus  in  the  way  of  stock  to  ''sweeten"  the  trans- 
action in  connection  with  the  sale  of  the  bonds,  so  that  the 
difference  between  the  money  necessary  for  an  absolutely  new 
company  and  the  par  value  of  the  securities  may  run  as  high  as 
25  per  cent,  or  50  per  cent,  of  the  cash  needed  to  complete  the 
property. 

Properties  already  in  operation  showing  a  fair  margin  of  profit, 
two  or  three  times  the  interest  charges,  will  usually  obtain  money 
at  lower  cost,  probably  not  to  exceed  10  per  cent. 

In  determining  the  amount  fairly  allowable  in  capitalization, 
for  discounts  on  bonds,  consideration  must  be  had  of  the  proper 
proportion  of  stock  to  bonds.  This  matter  has  very  carefully 
been  considered  by  the  Public  Service  Commission  of  New  York, 
First  District,  and  its  views  set  forth  as  follows: 

"The  ordinary  method  of  raising  funds  must  also  be  considered,  for 
money  can  be  secured  by  the  issuance  of  bonds  at  a  lower  rate  than 
stockholders  demand.  Other  things  being  equal,  the  rate  of  interest 
which  must  be  paid  increases  as  the  proportion  of  the  capital  raised  by 
the  issuance  of  bonds  increases.  Under  ordinary  circumstances,  a 
public  service  corporation  would  be  conservatively  financed  if  one-half 
or  two-thirds  of  the  funds  needed  were  secured  by  first  mortgage  bonds 
and  the  remainder  by  the  issuance  of  capital  stock.  In  a  case  such  as 
the  one  now  being  considered,  probably  one-half  of  the  cost  of  the  plant 
could  be  raised  by  the  issuance  of  first  mortgage  bonds  upon  a  basis  of 
from  5  to  6  per  cent.  As  a  matter  of  fact,  the  par  value  of  the  bonds  of 
the  present  company  is  e(iual  to  the  stock.  It  is  also  probable  that  a 
return  of  from  8  to  10  per  cent,  upon  the  stock  would  attract  sufficient 
capital  to  provide  the  remainder. 

"The  following  table  illustrates  the  results  of  certain  combinations 
of  the  above  factors : 


EXPENSES 


121 


Case 

Proportion 
of  capital 

represented 
by  bonds 

Rate  of 
return 
thereon 

Proportion 
of  capital 

represented 
by  stock 

Per  cent, 
of  return 
thereon 

Average 

rate  of 

return  upon 

entire 
investment 

1 

1/2 

6 

1/2 

10 

8         per  cent. 

2 

1/2 

5  1/2 

1/2 

10 

7  3/4  per  cent. 

3 

1/2 

5 

1/2 

9 

7          per  cent. 

4 

1/2 

5 

1/2 

8 

6  1/2  per  cent. 

5 

2/3 

6 

1/3 

10 

7  1/3  per  cent. 

6 

2/3 

5  1/2 

1/3 

10 

7          per  cent. 

7 

2/3 

5 

1/3 

9 

6  1/3  per  cent. 

8 

2/3 

5 

1/3 

8 

6          per  cent. 

"To  illustrate,  assume  that  the  amount  of  money  to  be  raised  is 
$3,000,000,  that  one-half  of  this  amount  will  be  raised  through  bonds  and 
one-half  through  stock,  that  bonds  are  sold  upon  a  5  per  cent,  basis, 
and  that  a  9  per  cent,  return  is  necessary  to  attract  stockholders.  The 
interest  and  dividends  would  be  as  follows: 

5  per  cent,  interest  upon  the  bonds  (par  value  $1,500,000)      $  75,000 
9  per  cent,  dividends  on  stocks  (face  value  $1,500,000) 135,000 

Total  interest  and  dividends $210,000 

"  This  is  equivalent  to  7  per  cent,  upon  the  total  value  of  the  property, 
assumed  to  be  $3,000,000,  as  shown  by  Case  3.'" 

The  Railroad  Commission  of  the  State  of  Washington  held 

"That  safe  or  well-secured  bonds  are  such  as  have  behind  them  the 
guarantee  of  an  independent  solvent  or  strong  road,  or  where  the  amount 
required  would  not  exceed  75  per  cent,  of  the  amount  invested,  providing 
investigation  shows  the  enterprise  to  be  an  inviting  one."^ 

The  Company  claimed  a  discount  should  be  allowed  on  the 
total  cost  of  reproduction  which  the  Commission  refused  to 
allow,  although  admitting 

"all  monej^s,  including  organization  cost  and  preliminary  surveys,  were 
covered  by  the  issue  and  sale  of  bonds.  In  the  judgment  of  the  Com- 
mission such  is  not  a  financial  business  loan;  it  is  financial  speculation."  ^ 

'  Decision  of  Public  Service  Commission,  First  District,  June  23d,  1911, 
gas  and  electric  rates  charged  by  the  Queensboro  Gas  and  Electric  Company. 

2  W.  H.  Paulhaumus  vs.  Puget  Sound  Electric  Railway,  Railway  Com- 
mission of  Washington,  order  Feb.  26,  1910. 


122  VALUATION  OF  PUBLIC  UTILITIES 

The  above  quotations  may  be  taken  as  fairly  indicating  the 
general  attitude  of  commissions,  possibly  also  public  opinion, 
for  the  usual  case,  but  it  is  not  always  possible  to  raise  money 
on  such  division  of  stock  and  bonds.  That  such  is  the  case  has 
been  recognized  by  the  Public  Service  Commission  of  New  York, 
Second  District,  in  authorizing  the  issuance  of  bonds  exclu- 
sively to  pay  for  the  construction  of  the  Hudson  River  and 
Eastern  Traction  Company's  electric  road.  The  company's 
representatives  stated,  at  hearings  before  the  Commission,  that 
subscription  for  stock  could  not  be  obtained,  whereupon  the 
Commission,  facing  the  alternative  of  permitting  the  company 
to  buUd  the  road  with  the  proceeds  derived  exclusively  from  the 
sale  of  bonds  or  else  preventing  the  construction,  authorized  an 
issue  of  $806,000,000  worth  of  bonds,  par  value,  but  expressly 
disavowing  any  responsibility  to  the  purchaser  of  said  bonds. 

The  proper  discount  allowable  from  the  face  value  of  bonds 
will  depend  upon  a  number  of  conditions  such  as  the  rate  of 
interest  they  bear,  the  proportion  of  the  total  money  invested 
in  the  enterprise  to  be  supplied  through  the  sale  of  bonds,  the 
earnings,  both  present  and  anticipated,  the  character  of  the 
men  associated  in  the  enterprise,  the  type  of  enterprise  itself 
as  to  location,  franchises,  etc.,  and  especially  upon  the  state 
of  the  financial  market. 

During  the  past  few  years  the  Public  Service  Commissions 
have  approved  the  issuing  of  bonds  at  discounts  varying  from 
zero  to  25  per  cent,  depending  upon  the  local  conditions  and  the 
corporation  being  considered.  The  Railroad  Commission  of 
Wisconsin  has  found  it  repeatedly  necessary  to  permit  the  selling 
of  bonds  at  not  less  than  75,  whereas  the  Public  Service  Commis- 
sion of  New  York  State  has  usually  fixed  85  as  the  minimum 
price,  although  in  a  number  of  instances  authorizing  the  sale 
of  bonds  as  low  as  80.  As  indicating  average  figures  it  is 
interesting  to  note  that  the  Public  Service  Commission  of  New 
York,  Second  District,  reported  that  it  had  authorized  in  1908 
$63,000,000,000  bonds,  par  value,  to  be  issued,  carrying  an 
average  rate  of  interest  of  4.29  per  cent.,  which  brought  an 
average  price  of  sale  of  88.  The  same  Commission,  in  1909, 
authorized  $39,000,000,000' of  bonds  which  sold  at  87.6,  so  that, 
for  New  York  State,  not  including  New  York  City,  a  discount 
of  about  12  per  cent,  would  seem  to  be  an  average  figure. 

Promoter's  Profit. — It  is  difficult  to  appreciate  why  any  one 


EXPENSES  123 

should  raise  a  question  as  to  the  propriety  of  compensation  to 
the  organizers  or  promoters  of  an  enterprise. 

The  services  of  the  promoters  are  in  some  respects  like  those 
of  the  engineers  who  design  the  physical  property.  No  one 
denies  proper  compensation  to  the  engineers  for  determining  the 
kind  of  plant  to  be  used  and  superintending  its  purchase  and 
installation,  but  it  is  the  organizers  who  conceive  the  under- 
taking, evolve  the  plans,  promote  the  enterprise  and  supply  the 
energy  which  takes  the  hazard  and  obtains  the  means  to  carry 
the  venture  through  to  success. 

The  necessity  and  propriety  of  recognizing  the  proper  com- 
pensation for  promoters  who  as  entrepreneurs,  conceive  and  carry 
out  the  enterprise,  has  been  well  stated  in  the  following  language: 

"As  already  remarked,  the  Southern  Railway  is  the  consolidation 
of  numerous  independent  railroad  properties.  It  has  become  through 
this  process  of  growth  a  great  railroad  system  embracing  to-day  a 
mileage  of  more  than  6000  miles.  In  this  operation  properties  which 
were  worthless  have  been  put  together  to  form  a  valuable  whole.  The 
physical  condition  of  these  properties  has  been  enormously  imi^roved. 
The  facihties  afforded  to  their  patrons  have  been  increased.  The  whole 
territory  involved  must  be  benefitted  b)-  this  amalgamation,  so  far  as 
its  ph5'sical  service  is  concerned. 

"This  enterprise  is  a  perfectly  legitimate  one.  The  men  who  have 
conceived  and  executed  it  are  entitled  to  a  fair  return  upon  the  money 
which  has  been  actually  invested  in  it.  They  are  entitled,  in  addition, 
to  a  reasonable  profit  upon  the  ability  to  conceive  and  execute  a  project 
of  this  sort."^ 

The  Railroad  Securities  Commission  appointed  only  a  few 
months  ago  by  President  Taft,  recognizes  the  appropriateness 
and  legality  of  the  promoters'  profits  in  the  following  words: 

"We  are  told  that  the  profit  of  the  promoter  represents  a  wholly 
unnecessarj'  burden  upon  the  American  public,  and  that  so  far  as  this 
profit  can  be  done  away  with,  it  will  be  good  for  all  parties.  Neither 
of  these  statements  is  quite  true.  The  promoters,  using  the  term  in  a 
broad  sense,  may  be  divided  into  two  classes;  constructors  who  build 
a  road  whose  future  is  uncertain,  in  the  expectation  of  selling  the  stock 
for  more  than  it  cost  them;  and  financiers  who  induce  the  public  to 
bu)'  the  bonds  of  such  roads.  Both  of  these  classes,  if  they  do  their 
work  honestly,  render  useful  services  to  the  public.  The  constructor 
gives  our  undeveloped  districts  the  benefit  of  new  roads,  which  they 

*  City  of  Danville  et  al.  vs.  Southern  Railway  Company  et  al.,  81  C.  C.  R. 
409,  page  438. 


124  VALUATION  OF  PUBLIC  UTILITIES 

would  not  get  without  his  intervention;  and  if  he  does  his  business 
well  he  builds  the  roads  more  economically  than  anybody  could.  The 
financier  renders  an  equally  important  service  in  collecting  the  capital 
of  the  investors  to  build  new  railroads  or  improve  old  ones.  On  the 
Continent  of  Europe  this  is  done  by  the  banks.  The  great  banking 
concerns  of  Germany  use  a  very  considerable  part  of  their  deposits 
in  carrying  industrial  enterprises  during  their  initial  stages  before  their 
merits  have  been  demonstrated,  and  then  disposing  of  them  to  the 
actual  investor  at  a  profit  in  order  to  set  their  capital  free  for  the 
floating  of  new  concerns.  But  in  the  United  States  the  power  of  the 
banks  to  do  this  is  limited  by  law  and  by  custom;  and  so  far  as  they 
either  cannot  or  do  not,  it  must  be  done  by  financial  houses  especially 
organized  for  the  purpose. 

"Our  American  system  undoubtedly  involves  grave  possibilities  of 
fraud.  The  man  who  is  constructing  a  road  is  tempted  to  persuade 
people  to  loan  him  money  on  inadequate  security.  The  financiers  may 
be  tempted  to  wink  at  this  deception.  Worst  of  all,  the  roads  thus 
built  may  be  built  for  sale  at  an  inflated  valuation.  The  promoter  may 
obtain  his  profit,  not  from  the  legitimate  increase  of  the  value  of  the 
property,  but  from  his  power  to  persuade  the  management  of  some 
larger  system  to  buy  the  branch  road  for  more  than  it  is  really  worth. 
These  are  evils  which  publicity  would  do  much  to  check.  Where  there 
is  no  fraud,  the  promoter  renders  a  service  for  which  he  is  entitled  to 
fair  remuneration."^ 

It  is  not  always  easy  to  determine  the  exact  value  of  the 
promoters'  services.  It  has  been  argued  that  a  uniform  per- 
centage of  the  value  of  the  physical  investment  should  be  taken 
as  the  compensation  due  the  promoter,  as  for  example,  the 
allowance  of  five  per  cent,  by  the  Public  Service  Commission 
of  New  York,  Second  District,  in  the  Rochester,  Corning  and 
Elmira  Traction  Company  decision.  But,  where  possible, 
probably  a  fairer  method  is  to  ascertain  for  each  particular 
case,  an  approximation  of  the  value  of  the  services  rendered 
by  ascertaining  how  long  the  promoter  has  been  engaged  in  the 
work,  what  he  has  accomplished  and  what  his  expenses  have 
been.  This  method  usually  results  in  the  allowance  of  a  lump 
sum  and  has  been  recognized  in  decisions  of  the  New  York  and 
Wisconsin  Public  Service  Commissions.  While  it  should  be 
acknowledged  that  men  of  character  and  standing  are  engaged 
in  the  promotion  of  enterprises  and  that  their  services  are  entitled 
to  a  legitimate  return;  that  does  not  mean,  however,  any  recog- 

^  Report  of  the  Railroad  Securities  Commission  to  the  President,  Novem- 
ber, 1911,  page  32. 


EXPENSES  125 

nition  of  effort  to  exploit  and  promote  corporations  that  are 
illegitimate  or  bankrupt. 

What  has  sometimes  facetiously  been  referred  to  as  "Water" 
in  the  securities  of  a  corporation,  is  reall}^  nothing  more  than 
an  unfairly  large  promoters'  profit.  To  the  extent  that  "  Water" 
properh^  and  honestly  represents  the  cost  of  promoting  an  enter- 
prise, its  recognition  in  capitalization  is  perfectly  right  and 
proper  as  without  encouragement  and  remuneration,  no  enter- 
prise involving  risk  will  be  undertaken. 

Working  Capital. — From  the  time  the  actual  promotion  of  a 
corporation  begins,  continuing  during  the  period  of  construction 
and  down  into  and  through  its  existence  as  an  operating  entity, 
available  cash  in  hand,  beyond  that  required  to  meet  predeter- 
mined expenditures,  is  essential  to  success.  To  anyone  who  has 
had  practical  experience  in  operating  a  utility  corporation,  it  is 
unthinkable  that  a  reasonable  amount  of  working  capital,  that  is, 
cash  in  bank,  should  not  be  provided  as  a  part  of  the  property. 
The  working  capital,  a  fund  available  as  a  surge  tank,  provides 
not  alone  for  the  payment  of  operating  expenses  as  they  accrue, 
permits  taking  advantage  of  cash  discounts,  affords  the  all 
essential  in  case  of  emergency,  but  as  much  as  anything  else, 
maintains  the  general  credit  and  efficiency  of  the  organization. 
A  company  that  does  not  ordinarily  keep  to  its  credit  in  the 
bank,  a  cash  balance,  bearing  some  proper  relation  to  its  business 
transactions,  cannot  hope  to  obtain  accommodation  in  the 
way  of  temporary  loans  or  discounts.  Moreover,  no  one  thing 
as  thoroughly  reduces  the  efficiency  of  any  organization,  from 
the  highest  official  down,  as  to  be  compelled  to  await  collections, 
instead  of  having  a  cash  fund  from  which  to  meet  obligations. 

The  reasonableness  of  the  foregoing  has  been  widely  recog- 
nized and  the  legality  of  maintaining  sufficient  working  capital, 
cash,  materials  and  supplies,  has  been  fully  sustained. 

"That  phrase  (working  capital)  means  the  amount  of  cash  necessary 
for  the  safe  and  convenient  transaction  of  a  business,  having  regard 
to  the  owner's  ordinary  outstandings,  both  payable  and  receivable ;  the 
ordinary  condition  of  his  stock  or  suppHes  in  hand;  the  natural  risk  of 
his  business,  and  the  condition  of  liis  credit;  and  unless  these  matters 
and  perhaps  others,  be  looked  into  no  comparison  can  be  drawn  be- 
tween one  business  and  another,  or  even  between  those  of  the  same 
general  nature."^ 

^  Consolidated  Gas  Company  vs.  Cit}^  of  New  York,  Judge  Hough,  Circuit 
Court  of  the  U.  S.,  Southern  District  of  New  York,  page  13. 


126  VALUATION  OF  PUBLIC  UTILITIES 

"A  gas  company  must  purchase  material  and  supplies,  must  pay 
its  employees  and  must  distribute  its  commodity  to  consumers  in 
advance  of  such  service.  This  requires  a  fund  ordinarily  called  working 
capital.  It  is  reimbursed  from  operating  receipts  from  time  to  time, 
but  originally  is  provided  from  capital.  The  amount  needed  depends 
on  the  advances  that  must  be  made  and  the  period  for  which  they 
must  be  carried."* 

In  the  case  of  Queens  Borough  Gas  and  Electric  Company 
the  commission  allowed  3.7  per  cent,  on  the  present  value  of 
the  complete  property  of  the  electric  plant  and  6.2  per  cent,  on 
the  present  value  of  the  complete  gas  plant  for  working  capital. 

"When  considering  working  capital  it  is  not  necessary  to  provide 
for  taxes,  interest,  dividends,  and  other  fixed  charges  of  a  similar 
nature.     These  are  paid  from  operating  income  and  not  from  capital."^ 

"However,  it  does  seem  proper  to  provide  for  materials  and  supplies 
to  meet  repairs  and  renewals  promptly."* 

In  this  case  the  Commission  allowed  3.75  per  cent,  on  the 
present  value  of  the  property  complete,  for  working  capital. 

"For  a  company  so  situated  as  the  one  in  question  here,  the  essential 
items  in  working  capital  would  seem  to  consist  of  stocks  and  suppUes 
and  cash  on  hand. 

"Regarding  the  method  of  estimating  the  amount  required  for 
working  capital  there  was  some  variance  in  the  testimony.  One 
witness  said  that  frequently  one-third  of  the  yearly  receipts  was 
adopted  to  estimate  the  amount  of  working  capital,  but  that  in  actual 
business  it  was  estimated  by  trial  and  error.  The  relation  between 
fixed  and  quick  assets,  witness  stated,  varies  with  the  size  of  the  plant, 
being  larger  in  a  small  plant  because  the  large  company  is  better  able 
to  handle  finances.  Remarking  that  no  general  rule  would  be  appli- 
cable, without  adjustment,  to  determine  the  amount  of  working 
capital  which  should  be  allowed,  this  witness  said  he  had  "found  that 
in  this  case  10  per  cent,  of  the  total  capitalization  should  be  kept 
hquid.  Witness  mentioned  another  basis  for  determining  a  fair  work- 
ing capital  for  gas  business,  viz.,  according  to  a  certain  number  of  cents 
per  1,000  cu.  ft.  of  gas  sold,  but  later  qualified  his  testimony  by  stating 

'  Case  Xo.  1273  Mayhew  vs.  Kings  County  Lighting  Company.  Decision 
dated  October  20,  1911.  Also  in  the  matter  of  the  Queens  Borough  Gas 
and  Electric  Company.  Decision  dated  June  23,  1911.  Public  Service 
Commission  of  Xew  York,  First  District. 

"  Case  No.  1273  Mayhew  vs.  Kings  County  Lighting  Company.  Decision 
dated  October  20,  1911.  PubKc  Service  Commission  of  New  York,  First 
District. 


EXPENSES  127 

that  this  is  not  as  good  a  method  because  the  sales  continually  vary. 
Witness  had  used  20  cents  per  1,000  ft.  and  sometimes  30  cents.  He 
considered  30  cents  reasonable  under  general  conditions,  but  admitted 
that  in  a  large  companj^  a  less  rate  would  be  sufficient.  He  thought 
30  cents  to  be  a  fairly  reasonable  figure  to  be  used  in  a  company  of 
the  size  of  that  in  this  case. 

"Another  witness  declared  that  he  considered  the  working  capital 
to  consist  of  the  difference  between  the  quick  assets  and  liabilities 
when  the  former  were  the  greatest.  That  is,  the  working  capital 
consists  of  the  amount  by  which  the  current  or  quick  assets,  as  dis- 
tinguished from  quick  assets,  exceeds  the  sum  of  the  current  or  quick 
liabilities,  as  distinguished  from  the  fixed  liabihties.  This  is  no  doubt 
true,  but  these  facts  show  the  existing  condition  of  a  plant  in  this 
respect  rather  than  the  amount  that  is  actually  required  for  working 
capital."  ***** 

"These  facts  are  significant.  They  show  that  the  company  is  in  a 
position  where  it  is  practicable  for  it  to  meet  at  least  the  greater  pro- 
portion of  its  current  outlays,  from  its  current  receipts,  or  to  meet  these 
outlays  on  a  basis  that  is  practically  the  equivalent  of  cash  transac- 
tions  In  fact  it  appears  to  us  that  a  working  capital  of 

even  less  than  15  per  cent,  of  the  amount  derived  from  the  sales  of  the 
gas  and  current,  or,  of  from  S45,000  to  $50,000  is  fully  adequate  under 
present  conditions."^ 

Non-Existent  Property. — ^A  study  of  the  history  of  each  utility 
property  being  appraised  is  necessary  in  order  to  ascert;ain 
whether  expenditures  have  been  made  in  the  past  for  physical 
plant  of  which  no  evidence  longer  exists.  Public  opinion,  city 
ordinance,  state  legislation,  inadequacy  or  obsolescence  may  have 
caused  the  abandonment  of  property  before  it  was  worn  out,  the 
cost  of  which,  where  determinable,  less  scrap  or  salvage  value 
must  be  considered  as  one  of  the  expenses  involved  in  bringing 
the  property  to  its  present  state  of  adequacy  and  efficiency. 
This  cost,  or  as  much  of  the  same  as  is  proper,  must  be  allowed 
as  an  intangible  value  to  be  included  as  one  of  the  items  of 
capitalization  either  among  Development  Expenses,  or  as  Going 
Value  unless  earnings  have  been  sufficient  to  permit,  without 
injustice  to  the  holders  of  securities,  the  writing  off  of  the  whole 
or  a  part  of  such  cost,  in  which  latter  case  only  the  remaining 
balance  is  applicable  for  capitalization. 

'  State  Journal  Printing  Company  vs.  Madison  Gas  &  Electric  Company 
Decision,  March  S,  1910.     Railroad  Commission  of  Wisconsin. 


128  VALUATION  OF  PUBLIC  UTILITIES 

"I  am  further  satisfied  that  this  amount  (reproduction  value)  is  not 
the  true  measure  of  the  value  of  the  investment  in  the  enterprise.  It 
leaves  out  of  consideration  any  allowance  for  necessary  and  reasonable 
investment  and  purchase  of  the  old  lines  and  equipments,  which  were 
indispensable  to  the  completed  improvement,  but  of  Avhich  a  large  part 
was  of  such  nature  that  it  does  not  count  in  the  final  inventory."^ 

In  making  a  valuation,  it  is  necessary  to  consider  the  local 
conditions  under  which  the  physical  plant  being  appraised,  was 
installed.  In  order  to  accommodate  the  public,  avoid  the  accu- 
mulation of  overhead  expenses  and  to  permit  the  early  beginning 
of  operating  income,  it  is  frequently  advisable  to  expend  con- 
siderable amounts  of  money  for  temporary  structures,  work  or 
apparatus.  For  example,  in  changing  over  the  cable  roads  to 
electricity  in  New  York  City,  inexpensive,  inefficient,  electric 
generating  units  were  installed,  synchronous  converters,  to  be 
used  later  in  connection  with  a  central  power  plant,  were  tem- 
porarily set  up  and  belted  to  the  old  cable  engines  and  used  to 
furnish  energy  until  the  power-house  was  completed.  In  con- 
nection with  the  construction  of  water  works  in  the  new  town  of 
Gary,  Indiana,  it  was  found  necessary,  in  order  to  accommodate 
the  public,  to  install  temporary  mains  and  connections,  after- 
ward replaced  by  permanent  construction  which  gave  no  indi- 
cation of  the  temporary  work,  the  expense  of  which  was  a  neces- 
sary part  of  the  cost  of  the  completed  property.  The  necessity 
for  change  of  plan  in  the  construction  of  the  last  Croton  dam, 
by  the  City  of  New  York,  involving  an  outlay  estimated  at  over 
$1,000,000  for  which  there  is  nothing  to  show  in  the  cost  of  repro- 
duction of  the  present  physical  plant,  the  unexpected  accident 
in  the  boring  of  the  Loetschberg  tunnel  in  Switzerland,  which 
required  the  abandoning  of  a  costly  part  of  the  work  and  diversion 
of  the  original  line,  the  failure  of  the  Quebec  bridge,  now  being 
built,  are  but  typical  examples  of  what  might  be  cited  to  show 
that  without  any  necessary  error  or  negligence,  expenditures 
have  been  made  without  the  accomplishment  of  any  tangible 
result,  the  cost  of  which  must  be  fairly  considered  in  determining 
reproduction  values. 

^  Milwaukee  Electric  Railway  and  Light  Company  vs.  City  of  Milwaukee, 
87  Fed.  585. 


CH-IPTER  VII 

FRANCHISES,  GOOD  WILL,  GOING  VALUE,  CONTRACTS 

Franchises. — Among  the  earliest  efforts  to  fix  intangible  values 
accruing  to  utility  properties,  was  the  attempted  evaluation  of 
franchises.  During  the  past  years,  various  methods  and  bases 
of  appraising  franchises  have  been  evolved,  but  few  are  worthy 
of  serious  consideration,  or  can  be  accepted  in  any  way  as  stand- 
ard. The  present-day  tendency,  undoubtedly,  seeks  to,  and  in 
fact  the  laws  of  some  states  actually  do,  prohibit  the  capitaliza- 
tion of  franchises  beyond  the  actual  cash  expended,  in  good  faith, ^ 
in  obtaining  them  from  proper  public  authorities.  Nevertheless 
it  is  and  has  been  generally  recognized  that  certain  vested  rights 
may  accrue  to  franchises,  of  which  the  owners  may  not  be  deprived. 

"Private  citizens  may  acquire  vested  property  rights  through  a  series 
of  even  erroneous  decisions;  rights  so  firmly  vested  that  it  becomes 
unconstitutional  for  the  court  which  persisted  in  error  suddenly  to  rectify 
its  mistakes  to  the  detriment  of  those  who  had  securely  rested  upon  the 
decisions  sought  to  be  invaUdated."^ 

Although  disinclined  to  allow  any  value  accruing  to  fran- 
chises, aside  from  that  in  the  plant  itself,  the  Supreme  Court, 
recognizing  the  fact  that  the  New  York  State  Legislature  had 
acquiesced  in  the  capitalization  of  the  franchise  of  the  Consoli- 
dated Gas  Company,  allowed,  in  round  numbers,  $7,500,000.00 
expressly  for  franchise,  reducing  to  that  amount  the  allowance 
of  the  lower  court,  of  $12,000,000.00,  adding  by  way  of  explaining 
its  refusal  to  recognize  any  increase  over  the  original  amount: 

"But  although  the  state  ought  for  these  reasons  (appUcable  to  this 
case — not  general)  to  be  bound  to  recognize  the  value  agreed  upon  in 
1884  as  part  of  the  property  upon  which  a  reasonable  return  can  be 
demanded,  we  do  not  think  an  increase  in  that  valuation  ought  to  be 
allowed  upon  the  theory  suggested  by  the  Court  below.  Because  the 
amount  of  gas  supplied  has  increased  to  the  extent  stated,  and  the 

^  Consolidated  Gas  Case  vs.  City  of  New  York,  157  Fed.  878. 
9  129 


130  VALUATION  OF  PUBLIC  UTILITIES 

other  and  tangible  property  of  the  corporations  has  increased  so  largely 
in  value,  is  not,  as  it  seems  to  us,  any  reason  for  attributing  a  like 
proportional  increase  in  the  value  of  the  franchises.  Real  estate  may 
have  increased  in  value  very  largely,  as  also  the  personal  property, 
without  any  necessary  increase  in  the  value  of  the  franchises.  Its  past 
value  was  founded  upon  the  opportunity  of  obtaining  these  enormous 
and  excessive  returns  upon  the  property  of  the  company,  without 
legislative  interference  with  the  price  for  the  supply  of  gas,  but  that 
immunity  for  the  future  was,  of  course,  uncertain,  and  the  moment  it 
ceased  and  the  legislature  reduced  the  earnings  to  a  reasonable  sum, 
the  great  value  of  the  franchises  would  be  at  once  and  unfavorably 
affected,  but  how  much  so  it  is  not  possible  for  us  to  see.  The  value 
would  most  certainly  not  increase." 

"What  has  been  said  herein  regarding  the  value  of  the  franchises 
in  this  case  has  been  necessarily  founded  upon  its  own  peculiar  facts, 
and  the  decision  can  form  no  precedent  in  regard  to  the  valuation  of 
franchises  generally  where  the  facts  are  not  similar  to  those  in  the 
case  before  us."^ 

Probably  one  of  the  clearest  expositions  of  the  present  attitude 
of  mind  of  public  authorities  and  the  courts,  as  to  the  values  of 
franchises,  has  been  expressed  by  the  Federal  Court  as  follows: 

"Should  a  corporation  have  a  right  to  demand  an  income  return, 
separable  from  any  return  upon  its  tangible  property,  from  its  right 
to  place  gas  mains  in  the  public  streets  and  maintain  them  for  its 
private  profit,  a  right  which  it  did  not  buy  from  city  or  state  or  pay 
therefor  any  legal  valuable  consideration?  The  Court  thinks  not, 
because  'Return  can  be  expected  only  from  investment,  and  he  that 
invests  must  part  with  something  in  the  act  of  investing.'  Does  any 
company  invest  its  franchise  in  its  business?  It  does  not  part  with 
its  franchise  in  the  same  way  it  parted  with  money  or  money's  worth 
in  acquiring  or  creating  mains  or  plants.  The  investment  of  property 
was  made,  not  in  the  franchise,  but  under  the  franchise,  and  on  the  faith 
thereof.  The  franchise  is  but  a  part  of  the  power  of  sovereignty,  allotted 
to  a  private  person  for  the  benefit  of  all,  and  only  incidentally  given  for 
private  emoluments. 

"What  is  the  value  of  a  franchise  to  perform  a  certain  service,  under 
which  no  money  is  invested  and  no  service  yet  performed?  What  is 
it  w^orth  apart  from  performance  under  it? 

"Unless  it  can  be  seen  to  possess  inherent  value  entirely  apart  from 
the  earning  capacity  of  the  subsequent  investment  or  from  the  actual 
earnings  resulting  from  such  investment,  the  value  asserted  or  claimed 

'  Wilcox  vs.  Consolidated  Gas  Company,  212  U.  S.  47. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         131 

is  but  a  duplication  of  that  derived  from  the  use  of  the  tangible  property 
when  so  invested. 

"The  concepts  of  the  nature  and  value  of  franchises  are  seen  dimly 
and  confusedly  because  of  the  failure  to  distinguish  between  productive 
and  non-productive  property.  Land,  money,  chattels  may  by  industry 
and  intelligence  be  made  productive  without  a  franchise;  but  no  excel- 
lence in  these  desirable  qualities  can  ultimately  render  a  franchise  produc- 
tive without  the  use  of  money,  chattels,  and  land  in  connection  there- 
with, and  when  the  juncture  is  made  the  earning  capacity  of  the  real 
and  personal  property,  plus  the  franchise  and  plus  intelligence  and 
industry,  is  really  no  greater  than  it  would  be  without  the  franchise, 
for  the  franchise  has  added  no  producing  power  to  the  realty  or  per- 
sonaUty;  it  has  but  authorized  their  employment  in  a  particular  way 
and  protected  the  owners  while  so  employing  them. 

"I  can  imagine  no  more  than  three  ways  in  which  the  value  of  a 
franchise  can  be  stated.  It  is  valuable:  (1)  because  it  authorizes  the 
gainful  use  of  private  property  in  a  particular  manner;  (2)  because  once 
obtained  it  is  often  difficult  or  impossible  to  get  another  like  it;  (3) 
because  it  may  be  used  to  injure  or  hinder  another  enterprise,  although 
itself  conferring  or  securing  nothing  of  value. 

"The  third  method  of  statement  has  been  accurately,  though  collo- 
quially, described  as  a  'nuisance  value,'  and  is  so  obviously  illegitimate 
as  to  require  no  discussion.  The  second  method  of  statement,  when 
carefully  considered,  asserts  that  because  the  sovereign  has  deemed  it 
advisable  to  entrust  a  pubhc  work  to  one  citizen  or  a  body  of  citizens 
such  quasi  monopolistic  grant  confers  the  right  to  charge  for  the 
service  more  than  would  be  just  or  lawful  were  the  occupation  open 
to  all.  Nor  does  it  change  the  truth  of  the  last  statement  that  the 
difficulty  of  procuring  franchises  produces,  and  long  has  produced,  a 
traffic  in  them.  On  every  private  sale  of  franchise  property,  the  price 
paid  is  so  much  money  lost  to  the  public  by  official  incompetence  or 
worse,  and  such  sale  can  confer  on  the  vendee  no  right  to  compel  the 
consumer  to  repay  him  a  price  that  should  have  been  paid  to  the  State. 
For  these  reasons,  I  believe  that  on  principle  a  franchise  should  be  held 
to  have  no  value  except  that  arising  from  its  use  as  a  shield  to  protect 
those  investing  their  property  on  the  faith  thereof,  and  that,  considered 
alone  and  apart  from  the  property  which  it  renders  fruitful,  it  possesses 
no  more  economic  value,  for  the  investor,  than  does  an  actual  shield 
possess  fighting  value  apart  from  the  soldier  who  bears  it."' 

Judge  R.  W.  Tayler  of  the  United  States  Circuit  Court  as 
arbitrator  of  the  recent  controversy  between  the  city  of  Cleveland 
and  the  local  Street  Railway  Company,  recognized  franchise 
value  and  allowed  the  company  $3,615,844  for  the  value  of  its 

'  Consolidated  Gas  Case,  157  Fed.,  page  872. 


132  VALUATION  OF  PUBLIC  UTILITIES 

franchise.  Judge  Tayler  obtained  this  value  by  capitalizing  the 
money  the  company  was  able  to  earn  over  5  3/4  per  cent,  allowed 
as  the  proper  return,  on  the  physical  value.  Other  and  impor- 
tant cases  could  be  cited,  such  as  the  settlement  with  the  Chicago 
Traction  Companies,  the  Michigan  appraisal  of  the  steam  rail- 
roads, etc.,  where  substantial  allowances  have  been  made  in 
capitalization  for  franchises. 

It  has  been  argued  that  a  franchise,  being  a  gift  from  the 
people,  should  not  be  capitalized  against  the  people  and  they  be 
compelled  to  pay  a  return  thereon.  On  the  other  hand,  during 
the  earlier  days,  under  other  than  existing  conditions,  franchises, 
recognized  as  valuable  privileges  which  it  would  not  be  necessary 
or  proper  to  grant  to-day,  where  given  as  inducements  for  the 
investment  of  capital  and  expenditure  of  effort,  with  the  assump- 
tion of  obligations  still  binding. 

The  objections  to  the  perpetual  franchise,  as  concerns  the  pub- 
lic, have  been  recognized  and  appreciated  for  many  years,  so  that 
while  desired  by  corporations,  perpetual  franchises  are  seldom  or 
never  granted  at  present,  consequently  their  valuation  is  most 
difficult  of  ascertainment  on  an}-  basis,  cost  of  reproduction, 
commercial  value,  or  original  cost.  Regardless  of  the  difficulties 
in  the  case,  an  appraisal  must  consider  the  business  contract 
entered  into  when  the  franchise  was  granted. 

In  many  instances  it  will  be  found  that  a  corporation  has 
extended  its  service  in  advance  of  demand,  relying  upon  future 
growth  of  the  business,  with  accompanying  profits,  to  compen- 
sate for  initial  losses.  If  these  losses  have  not  been  made  good, 
their  capitalization  may  represent  what  has  been  called  franchise 
value,  but  more  usually  going  value. 

Where  investors  have  shown  business  acumen  and  good  judg- 
ment in  entering  unexploited  territory,  obtaining  concessions 
which  have  been  made  the  basis  of  investment  and  enterprise, 
such  basis  should  logically  and  legally  be  recognized  in  ascertain- 
ing the  fair  value  of  the  property  being  appraised.  To  illustrate 
one  of  the  street  railway  companies,  operating  in  greater  New 
York,  years  ago  obtained  a  franchise  under  which  it  was  relieved 
from  any  obligation  to  maintain  and  repair  street  pavements 
within  and  adjoining  its  tracks.  The  annual  saving,  resulting 
from  such  valuable  franchise  granted  in  return  for  certain  obliga- 
tions assumed  by  the  company,  enables  the  latter  to  show  rela- 
tively larger  net  earnings  than  its  competitors;  consequently  the 


FRANCHISES.  GOOD  WILL,  CONTRACTS         133 

property  is  worth  more  to  its  owners.  This  value  might  be 
recognized  and  some  allowance  made  therefor,  regardless  of  the 
fact  that  in  case  of  a  new  companj^  being  granted  a  franchise  of 
the  same  character  at  present,  it  would  not  be  allowed  to  capitalize 
or  permitted  to  earn  profits  on  such  franchise. 

Less  valuable  to  the  corporations  than  perpetual  franchises, 
are  what  have  been  termed  "limited "  or  " short  term "  franchises, 
granted  for  a  specified  term,  usually  varying  from  10  to  50  years. 
While  such  form  of  franchises  have  fewer  objectionable  features, 
as  related  to  the  public,  than  perpetual  franchises,  all  proper 
capitalization  of  short  term  franchises  as  well  as  the  expenses 
involved  in  obtaining  them,  must  be  amortised  at  the  expense  of 
the  public,  during  the  terms  of  the  franchises.  The  valuation  of 
a  limited  term  franchise  is  more  easily  made  than  a  perpetual 
franchise,  the  former  usually  not  being  of  great  value,  aside  from 
the  permission  to  transact  business  unless  an  attempt  is  made  to 
determine  the  value  of  a  limited  franchise,  by  capitalizing  the  net 
earnings.  But,  as  in  the  case  of  a  perpetual  franchise,  any  such 
method  of  evaluation  must  be  based  on  the  assumption  that  the 
rates  being  charged  are  fair  and  reasonable  as  regards  the  total 
fair  value  of  the  property. 

Franchises  have  been  appraised  in  some  instances,  by  attempt- 
ing to  determine  in  a  general  way  their  relation  to  the  appraised 
value  of  the  physical  plant.  The  figures  used  would  seem  to  be 
derived  from  a  study  of  the  net  earnings  of  utility  corporations,  and 
primarily  established  through  a  capitalization  of  such  earnings. 
A  fairly  common  figure  that  has  been  used,  is  33  1/3  per  cent.,  that 
is,  the  value  of  the  physical  plant  is  ascertained,  and  33  1/3  per 
cent,  of  the  same,  taken  to  represent  the  value  of  the  franchise, 
is  added  to  the  physical  plant,  which  gives  the  total  appraised 
value.  An  examination  of  values  placed  on  many  franchises  in 
the  past  for  purposes  of  taxation,  capitalization,  condemnation, 
and  court  decisions,  will  indicate  that  perhaps  an  average  valua- 
tion in  such  cases,  is  not  far  from  one-third  of  the  total  replace- 
ment value  of  the  corporations'  assets.  This  ratio  though  arbi- 
trarily assumed,  and  an  approximate  method,  seems  to  be  about 
the  only  method  which  has  had  any  general  acceptance,  aside 
from  directly  capitalizing  the  net  earnings. 

In  the  state  appraisal  of  the  Michigan  railroads.  Prof.  H.  C. 
Adams  evolved  a  theory  of  "immaterial  properties,"  or  what  has 
been  called  "franchise"  valuation,  which  consisted  in  brief  of 


134  VALUATION  OF  PUBLIC  UTILITIES 

capitalizing  the  remainder  of  net  income,  after  deducting  all 
operating  expenses,  and  a  fair  rate  of  interest  on  the  value  of  the 
physical  property. 

Prof.  Adams  has  explained  his  rule  as  follows: 

"Sixth.  The  rule  submitted  for  the  appraisal  of  the  immaterial 
values  of  railway  properties,  or  what  I  prefer  to  term  the  capitaliz- 
ation of  corporate  organization  and  business  opportunity,  is  simple, 
as  follows: 

"1.  Begin  with  gross  earnings  from  operation,  deduct  therefrom  the 
aggregate  of  operating  expenses,  and  the  remainder  may  be  termed 
the  'income  from  operation.'  To  this  should  be  added  'income,  from 
corporate  investments,'  giving  a  sum  which  may  be  termed  'total 
income,'  and  which  represents  the  amount  at  the  disposal  of  the  corpo- 
ration for  the  support  of  its  capital  and  for  the  determination  of  its 
annual  surplus. 

"2.  Deduct  froni  the  above  amount,  that  is  to  say,  total  income, 
as  an  annuity  properly  chargeable  to  capital,  a  certain  jjer  cent,  of  the 
appraised  value  of  the  physical  properties. 

"3.  From  this  amount  should  be  deducted  taxes, ^  rents  paid  for 
the  lease  of  property  operated,  provided  such  property  is  not  covered 
by  the  physical  valuation  made  the  basis  of  the  annuity  referred  to 
under  paragraph  2,  and  permanent  improvements  charged  directly  to 
income.  The  remainder  would  represent  the  surplus  which,  capitalized 
at  a  certain  rate  of  interest,  gives  the  value  of  immaterial  properties.^ 

"The  nature  of  the  rule  presented  above  may  be  seen  more  clearly 
from  the  blank  form  next  presented,  being  the  form  to  which  the 
accounts  of  each  railroad  were  reduced  preparatory  to  compilation." 

^  The  Michigan  system  of  railway  accounts  prescribed  by  the  railroad  com- 
missioner includes  taxes  in  "operating  expenses,"  and  for  the  purpose  of 
this  analysis  such  inclusion  may  be  accepted. 

^  Extract  from  letter  of  Henry  C.  Adams,  dated  at  Ann  Arbor,  October, 
1900,  to  the  Board  of  State  Tax  Commissioners,  Lansing,  Mich.,  containing 
rule  for  computing  intangible  values  of  railway  corporations. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         135 


Form  of  Coiipilation 

Name  of  road 

Statement  showing  computation  of  the  value  of  the  non-physical  elements 
of  the  above-named  road,  whose  physical  elements  were,  on  November 

1,  1900,  officially  appraised  at  S 

Average  statement  for years  ending 


Items 

Item 

Amounts 

for  entire 

system 

Per  mile 
operated 

Amounts  ap- 
portioned to 
Michigan 

Number  of  miles  operated 



Gross  income  from  operation .  .  . 

.«; 

$               $               s 

Operating  expenses,  exclusive  of 
taxes 

' 

Net  income  from  operation .... 

! 

Net  income  from  investments . . 

1 1 1 

1 

Total  available  corporate  in- 
come  

i 

/    Annuity  deducted  for  capital  at 
)       4  per  cent,  of  the  mean  value 
(^      of  physical  elements 

i 

* 

Remainder  available  for  other 
purposes 

\ 

Further  deductions: 

1.  Taxes  on  physical  elements 
at   1   per  cent,   of   mean 
value 

• 

2.  Rentals    on    property    not 
covered  by  appraisal.  .  .  . 

3.  Interest  on  current  liabili- 
ties   

4.  Permanent    improvements 
charged  to  income 

Total  further  deductions. . 

Surplus 

Deficit 

, 



Capitalization  of  surplus  at  7  per 
cent,  which  results  in  a  value 
of  non-physical  elements  such 
that  it  jdelds  a  net  income  of  6 
per  cent,  after  payment  of  a 
tax  of  1  per  cent 

.«;... 

1 

^  Bureau  of  the  Census,  Bulletin  No.  21. 


136  VALUATION  OF  PUBLIC  UTILITIES 

A  similar  method  was  used  by  Prof.  Adams  in  valuing  the  fran- 
chises of  the  traction  companies  in  Chicago,  used  as  a  basis  of 
settlement  of  their  controversy  with  the  city.  In  Chicago,  the 
net  earnings  were  determined  by  deducting  all  operating  expenses, 
maintenance,  renewal  charges  and  taxes,  from  gross  receipts, 
thus  obtaining  a  net  income  from  which  interest  at  a  fair  rate,  on 
the  value  of  the  physical  plant,  was  deducted.  The  amount  of 
net  income  remaining  after  this  deduction  represented  the  value 
of  the  franchise  in  question,  by  capitalization. 

The  franchise  tax  commissioners  in  New  York  State,  in  deter- 
mining the  value  on  which  to  assess  the  special  franchise  tax,  as 
far  as  their  methods  are  disclosed,  first  appraise  the  physical 
plant  in  the  streets  or  on  other  public  property,  adding  the 
capitalization  of  net  earnings  at  2  to  5  per  cent.,  depending  on 
the  class  to  which  the  city  belongs,  thus  obtaining  what  is  called 
an  assessed  value  on  which  the  tax  is  computed. 

"The  method  of  assessment  followed  in  practice  is  to  ascertain  the 
value  of  all  tangible  property  of  a  given  corporation,  and  the  amount 
of  its  net  earnings,  allot  to  the  tangible  property  a  fair  return  out  of 
earnings,  and  capitalize  the  residue  thereof,  if  any,  at  the  same  fair  rate 
to  ascertain  the  value  of  the  special  franchise.  This  is  undoubtedly  an 
easy  and  convenient  method  of  affixing  the  tax,  but  as  a  scientific 
method  of  ascertaining  the  value  of  the  franchise  it  is  open  to  the 
obvious  objection  that  as  long  as  the  tangible  property  earns  anything, 
and  the  franchise  exists,  the  franchise  contributes  to  the  earning  power, 
because  it  is  only  by  virtue  of  the  franchise  that  anything  at  all  is 
earned.  Again,  as  a  method  of  valuation  allied  not  to  taxation,  but  to 
rate  regulation,  the  system  is  reducible  to  an  absurdity;  for  at  what 
point  of  time  is  the  inquiry  to  be  made?  Clearly  before  the  reduced 
rate  goes  into  effect.  Yet  by  this  method,  since  the  fair  rate  of  return 
upon  tangible  property  is  a  constant  figure,  the  capitalization  of  the 
residue  at  the  same  figure  will  always  give  a  valuation  for  the  franchise, 
rendering  reduction  impossible."  ^ 

In  New  York  State  the  Public  Service  Commissioners  are  pro- 
hibited, by  the  law  which  created  them,  from  allowing  any  value 
for  franchises  beyond  the  actual  expense  made  in  good  faith  in 
obtaining  them.  In  their  decisions,  the  Commissions  have  taken 
the  position  that  this  applies  as  well  to  corporations  in  existence 
before  the  creation  of  the  commissions,  as  well  as  to  corporations 

'  Consolidated  Gas  Company  vs.  City  of  New  York.     157  Fed.  877. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         137 

which  have  commenced  business  since  that  time  in  accordance 
with  the  public  service  law. 

In  an  attempt  to  evolve  a  form  of  franchise  which  will  encour- 
age the  investment  of  capital  and  efficient  utility  service  without 
inuring  to  the  damage  of  the  public,  through  loss  of  control  and 
regulation,  the  indeterminate  franchise  has  been  proposed.  The 
indeterminate  franchise  in  its  most  perfected  form  has  been 
developed  in  the  state  of  Wisconsin,  where  legislative  enactment 
has  been  made  to  compel  the  utilities  to  accept  indeterminate 
franchises.  The  theory  of  the  indeterminate  franchise  which  has 
been  called  "the  right  of  a  corporation  to  exercise  its  duties  dur- 
ing good  behavior,"  is  that  public  interest  shall  have  the  right  to 
terminate  a  franchise  whenever  the  public  may  so  determine; 
the  only  cjualification  being  that  at  the  time  of  taking,  compen- 
sation for  the  property  of  a  corporation  shall  be  paid.  In  Wis- 
consin the  amount  of  this  compensation  is  to  be  determined  bj'' 
the  Railroad  Commission  of  the  State.  A  modified  and  simpler 
form  of  indeterminate  franchise  has  existed  in  Massachusetts  for 
some  years.  The  traction  companies  in  Chicago  are  at  present 
operating  under  what  may  be  called  a  form  of  indeterminate 
franchise.  In  Washington,  D.  C,  Porto  Rico,  and  the  Philip- 
pines-, Congress  has  granted  only  a  form  of  franchise  which  per- 
mits of  its  alteration,  amendment  or  repeal,  at  the  option  of 
Congress. 

It  is  almost  unnecessary  to  state  that  the  value  of  an  indetermi- 
nate franchise  in  case  of  appraisal  would  be  only  the  actual  cash 
cost  of  obtaining  same. 

Good  Will. — The  natural  tendency  in  appraising  intangible 
values  is  to  group  them  and  endeavor  to  fix  a  given  amount  as 
covering  the  whole.  Such  treatment  may  seem  an  easy  solution 
of  a  complex  and  difficult  problem,  but  can  hardly  be  considered 
logical  or  scientific. 

One  of  the  common  meanings  of  ''going  value"  as  applied  to 
the  intangible  value  of  utility  property,  namely  the  capitalization 
of  the  net  return,  could  be  applied  as  a  very  satisfactory  definition 
of  the  ''good  will"  of  an  industrial  enterprise.  The  present-day 
opinion,  both  of  the  public  and  its  officials,  leans  toward  a  mini- 
mizing or  entire  negligence  of  any  value  of  good  will  accruing  to 
a  public  utility  property.  This  attitude  of  mind,  however,  is  npV 
wholly  fair.  Competition,  in  many  instances,  does  exist  between 
public  utility  properties.     For  example,  street  railway  companies, 


138  VALUATION  OF  PUBLIC  UTILITIES 

operating  on  parallel  avenues,  or  in  competition  with  elevated 
roads  or  subways  on  the  same  avenues,  cannot  be  considered 
monopolies.  A  splendid  illustration  of  the  value  of  the  public 
good  will  is  evidenced  by  the  large  increase  and  steady  growth 
of  the  earnings  of  the  Third  Avenue  Street  Railway  system  in 
New  York  City,  after  the  property  was  put  in  good  physical  con- 
dition by  the  receiver.  In  the  same  way,  if  the  gas  and  electric 
utilities  are  separately  owned  and  operated  in  a  given  town, 
there  is  always  competition  for  the  lighting  business,  the  income 
from  which  will  be  determined  in  part  by  the  relative  amount  of 
good  will  iDOssessed  by  the  respective  companies.  How  to  evalu- 
ate such  good  will  is  most  difficult,  and  no  scientific  method  has 
yet  been  suggested,  aside  from  its  inclusion  in  going  value. 

"That  kind  of  good  will,  as  suggested  in  Wilcox  vs.  Consolidated  Gas 
Co.  212  U.  S.  19,  is  of  little  or  no  commercial  value  when  the  business  is, 
as  here,  a  natural  monopoly  with  which  the  customer  must  deal, 
whether  he  will  or  not."' 

"We  are  also  of  the  opinion  that  it  is  not  a  case  for  a  valuation  of 

good  will the  complainant  has  a  monopoly  in  fact,  and  a 

consumer  must  take  gas  from  it,  or  go  without.  He  will  resort  to  the 
"old  stand"  because  he  cannot  get  gas  anywhere  else.  The  Court 
below  excluded  that  item,  and  we  concur  in  that  action."^ 

Judge  Tayler  in  arbitrating  the  Cleveland  Traction  contro- 
versy, in  which  settlement  no  allowance  whatever  for  good  will 
was  made,  explained  his  views  as  follows: 

"I  allow  nothing  for  good  will.  A  street  railway  company  which  has 
a  monopoly,  and  especially  if  it  has  a  franchise  value  remaining,  can 
have  no  good  will  value." 

The  Wisconsin  Commission  has  followed  the  prevailing  opinion 
of  the  Courts  with  regard  to  good  will,  saying: 

"There  may  be  an  element  of  good  will  in  the  business  of  a  public 
service  corporation  where  competition  exists  and  the  public  may 
resort  to  more  than  one  public  utility  for  the  desired  service,  but  where 
the  public  is  confined  to  a  single  public  utility  for  the  service  the  latter 
undertakes,  it  would  seem  that  there  is  no  ground  upon  which  good 
will  can  be  predicated."^ 

1  Omaha  vs.  Omaha  Water  Co.  118  U.  S.  202. 

2  Wilcox,  vs.  U.  S.  Consolidated  Gas  Co.  212  U.  S.,  page  17. 

^  In  fixing  just  compensation  to  be  paid  to  the  Cashton  Light  and  Power 
Company,  decided  Nov.  28,  1908.     Raihoad  Commission  of  Wisconsin. 


FRANCHISES'  GOOD  WILL,  CONTRACTS         139 

Good  will  as  here  defined  probably  has  no  existence  separated 
from  or  apart  from  the  franchise  which  permits  the  earnings  to 
be  capitalized. 

As  indicating  the  variable  and  indefinite  value  attaching  to 
good  will,  the  following  opinions  of  courts  are  valuable: 

"A  monopoly  has  no  good  will,  for  its  customers  are  retained  by 
compulsion,  not  by  their  voluntary  choice."^ 

"  But  the  term  'good  will '  may  be  misleading.  Lord  Eldon  said  tliat 
'good  will '  is  nothing  more  than  the  probability  that  the  old  customers 

will  resort  to  the  old  place.     Cruttwell  vs.  Lye,  17  Ves.  Jr.  335 

Under  any  possible  definition  it  involves  an  element  of  personal  choice. 
This  phrase  is  inappropriate  where  there  can  be  no  choice.  So  far  as 
the  defendant's  system  is  'practically  exclusive,'  the  element  of  'good 
will'  should  not  be  considered.'" 

Going  Value. — Going  value,  or  going  concern  value,  like  the 
term  "depreciation,"  must  be  explained,  or  quahfied  to  make 
its  meaning  clear.  It  is  closely  allied  to  good  will,  but  the  courts 
are  inclined  to  distinguish  between  the  two;  ascribing  good  will 
to  competitive  enterprises,  and  going  value  to  monopolies.  To 
attain  any  appreciable  value,  both  going  value  and  good  will 
require  the  lapse  of  a  considerable  time,  and  they  are  usually  the 
result  of  the  expenditure  of  effort  or  investment,  or  both. 

Several  methods  have  been  used,  and  more  theories  suggested 
for  evaluating  going  value,  but  no  generally  accepted  rule  of  pro- 
cedure has  yet  been  determined.  It  is  probable  that  there  must 
be  considerable  further  evolution  of  the  subject  before  any  par- 
ticular method  can  be  generally  agreed  upon,  as  suitable  and 
applicable  for  all  cases. 

While  going  value  may  be  a  vague  term  capable  of  consider- 
able variation  in  meaning,  nevertheless,  however  defined,  it  is 
used  in  connection  with,  or  based  on  considerations  of  property 
income. 

Four  separate  interpretations  of  going  value  will  be  discussed, 
with  some  reference  to  court  decisions. 

First. — ^A  legal  and  economic,  recognized  value,  usually  deter- 
mined, in  an  approximate  way,  in  addition  to,  and  over  and 
above  the  value  of  the  physical  plant,  resulting  from  the  putting 
of   said   plant   into    actual    and   usefvd    operation.     The   value 

'  Bristol  vs.  Bristol  Water  Works,  23  R.  I.  278. 

'  Kennebec  Water  Dist.  vs.  Waterville,  97  Me.  185;  60  L.  R.  A.  868. 


140  VALUATION  OF  PUBLIC  UTILITIES 

may  be  based  on  merely  an  actual  expenditure  in  dollars,  or  an 
estimated  value  indicating  the  worth  of  the  service  performed,  in 
transforming  the  "dead"  into  a  "live"  income  producing 
property.  This  latter  meaning  is  not  the  same  as  "promoters' 
profit,"  but  is  akin  to  it,  and  both  services  have  undoubtedly 
been  taken  together  and  grouped  as  one  going  value  in  certain 
judicial  decisions.  This  use  of  the  term  "going  value"  in  con- 
nection with  the  expense  of  putting  an  organization  in  "motion" 
is  generally  acknowledged  and  recognized  as  a  proper  expenditure 
to  be  included  as  a  part  of  the  capitalization. 

It  may  represent  values  above  the  actual  cost  of  procuring 
certain  elements,  the  financial  outlay  for  which  may  have  been 
included  as  a  part  of  operating  expense,  but  the  knowledge  and 
experience  now  in  hand  is  a  distinct  asset,  apart  from  the  cash 
cost.  Among  the  elements  referred  to,  may  be  mentioned  co- 
operation of  employees,  public  officials,  a  clientele  resulting  from 
courteous  treatment  and  fair  dealing;  data  as  a  result  of  test  and 
experimentation,  organization  which  precludes  displacing  all 
employees  in  case  of  a  change  in  management  because  such  dis- 
placement would  necessitate  the  building  up  of  a  new  organiza- 
tion at  the  expense  of  the  public;  financial  standing  w^hich  enables 
a  corporation  to  obtain  better  prices  than  the  average. 

In  at  least  one  instance  27  per  cent,  of  the  appraised  value  of 
the  physical  plant  has  been  proposed  as  determining  the  proper 
ratio  of  going  value  to  physical  value.  Experts  in  appraisal  of 
waterworks  and  gas-plants  have  proposed  a  certain  fixed  sum 
per  connected  customer;  in  one  case  this  figure  was  fixed  at  $30.00 
as  a  proper  though  arbitrary  basis  for  determining  going  value. 

Another  proposal  favored  by  experts  of  standing  and  ability 
is  to  take  one-half  or  even  the  whole  of  the  amount  of  present, 
annual  gross  income  as  the  measure  of  going  value,  perhaps 
unconsciously  adopting  such  basis  because  of  a  knowledge  of  the 
cost  of  getting  a  corporation  fully  running  after  completion  of 
the  physical  plant. 

Justice  Moody,  of  the  Supreme  Court,  referring  to  "going 
concern"  in  the  Knoxville  Water  Company  rate  case,  and  men- 
tioning the  value  of  the  physical  plant  to  which  was  added 
$10,000.00  for  "organization  promotion,  etc.,  and  $60,000.00  for 
"going  concern,"  a  total  sum  of  $70,000.00,  says: 

"  The  latter  sum  we  understand  to  be  an  expression  of  the  added  value 
of  the  plant  as  a  whole,  over  the  sum  of  the  values  of  its  component 


FRANCHISES,  GOOD  WILL,  CONTRACTS         141 

parts,  which  is  attached  to  it  because  it  is  in  active  and  successful  opera- 
tion, and  earning  a  return.  We  express  no  opinion  as  to  the  propriety 
of  including  these  two  items  in  the  valuation  of  the  plant  for  the  purpose 
for  which  it  is  valued  in  this  case,  but  leave  that  question  to  be  con- 
sidered when  it  necessarily  arises.  We  assume,  without  deciding,  that 
these  items  were  properly  added  in  this  case."  ^ 

In  the  Omaha  case  which  involved  the  value  of  a  system  of 
waterworks  under  a  contract  for  its  purchase  by  the  city,  the 
Court  sustained  an  allowance  by  the  appraisers  for  "going  value/' 
saying: 

"The  appraisers  in  making  up  their  estimate  of  valuation  included 
$562,712.45  for  going  value 

"  The  value  in  equity  and  justice  must  include  whatever  is  contributed 
by  the  fact  of  the  connection  of  the  items  making  a  complete  and 
operating  plant.  The  difference  between  a  dead  plant  and  a  live  one 
is  a  real  value,  and  is  independent  of  any  franchise  to  go  on,  or  any 
mere  good  will  as  between  such  a  j^lant  and  its  customers."  ^ 

In  reviewing  a  decision  of  the  Texas  Railroad  Commission,  the 
Circuit  Court  said: 

"The  Commission  states  that  in  estimating  the  value  of  these  roads 
they  included  interest  on  the  money  invested  during  the  period  of 
construction.  This  is  somewhat  vague,  but  the  'period  of  construction  ' 
mentioned  is  probably  limited  to  the  time  when  each  section  of  the 
road  was  opened  to  the  public  for  business.  And  even  if  extended  to 
the  time  when  the  road  was  completed  to  Denison  and  to  Austin 
in  1873,  nearly  twenty  years  after  its  construction  was  begun  at 
Houston,  it  would  not  cover  all  of  the  time  and  possibly  not  nearly 
all  of  the  time  in  which  the  railroad  company  and  its  predecessors 
have  lost  interest  in  the  investment."^ 

Reference  should  also  be  made  to  the  recent  decision  of  Judge 
Hook,  in  which  he  says: 

"An  established  railroad  system  may  be  worth  more  than  its  original 
cost  and  more  than  the  mere  cost  of  its  physical  reproduction.  It  has 
passed  the  initial  period  of  little  or  no  return  to  its  owners  which,  of 
greater  or  less  duration,  almost  always  follows  construction,  and  is  not 
infrequently  marked  by  default  and  bankruptcy.  The  inevitable  errors 
in  its  building  which  finite  minds  and  hands  cannot  avoid  have  been 
measurably  corrected,  time  and  effort  have  produced  a  commercial 

^  City  of  Knoxville  vs.  Knoxville  Water  Company,  212  U.  S.  1. 

*  Omaha  vs.  Omaha  Water  Company,  118  U.  S.  202. 

'  Metropolitan   Trust   Co.  vs.  Houston  &  T.  C.  R.  R.  Co.  90  Fed.  683. 


142  VALUATION  OF  PUBLIC  UTILITIES 

adjustment  between  it  and  the  country  it  was  intended  to  serve,  rela- 
tions have  been  estabUshed  with  patrons,  and  sources  of  traffic  have 
been  opened  up  and  made  tributary.  In  other  words,  the  railroad, 
unhke  one  newly  constructed,  is  fully  equipped  and  is  doing  business 
as  a  going  concern.  It  has  attained  a  position  after  many  experiences 
common  to  railroad  enterprises  which  entail  loss  and  cost  not  paid 
from  current  earnings  and  which  correspondingly  make  for  value. "^ 

As  throwing  further  light  on  the  total  value  of  the  property  of 
an  active  going  corporation,  the  decision  of  the  Privy  Council  of 
England  in  the  case  of  appeal  from  the  Supreme  Court  of  New 
Zealand^  is  particularly  pertinent.    The  City  of  Hamilton  decided 

"to  purchase  the  gas  works  and  plant  at  a  price  to  be  determined  by 
arbitration  " 

from  the  local  company  under  the  franchise  agreement.  Arbi- 
trators were  appointed  and  they  made  two  valuations,  one 
covering  merely  the  physical  plant  and  the  second  includ- 
ing a  value  for  going  concern.  The  city  contended  the  lower 
value  should  be  accepted,  while  the  company  claimed  that  under 
proper  interpretation  of  the  wording  in  the  franchise  agree- 
ment they  were  entitled  to  remuneration  for  their  property  as  a 
going  concern.  The  matter  was  carried  through  the  various 
Courts  of  New  Zealand  and  finally  brought  to  the  Supreme  Court 
of  the  Kingdom,  the  Privy  Council  of  England,  which  held  that 
the  true  interpretation  of  the  clause  quoted  above  was 

"the  price  to  be  paid  for  the  said  gas  works  and  plants  should  be  the 
commercial  value  thereof  as  a  going  concern  and  not  merely  their 
structural  value." 

The  Privy  Council  called  attention  to  the  fact  that  under 
certain  decisions  previously  rendered  in  England,  awards  had 
been  made  in  cases  of  purchase,  merely  on  the  basis  of  the  price 
for  physical  property,  but  in  those  cases  the  basis  of  valuation 
had  been  clearly  defined  in  the  franchise  provisions,  whereas  in 
the  Hamilton  case,  if  physical  property  only  had  been  intended  to 
be  purchased, 

"such  limitation  should  plainly  and  could  easily  have  been  made  in 
language  which  would  have  excluded  every  monopoly,  good  will,  or 

>  M.  K.  &  T.  Ry.  Co.  vs.  Love  177  Fed.  493. 

2  Hamilton  Gas  Company,  Ltd.,  vs.  Mayor,  Councillors  and  Burgesses 
of  the  Borough  of  Hamilton,  1910,  App.  Cas.  300. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         143 

undertaking,  as  such,  from  being  included  within  the  term  'gas  works 
and  plant'  employed."  ^ 

The  position  taken  in  the  above  case,  by  the  Privy  Council,  was 
reaffirmed  in  a  decision  rendered  last  year,  in  the  matter  of  the 
appeal  of  the  City  of  Perth,  with  regard  to  the  value  of  the  Perth 
Gas  Company's  plant,  which  the  city  was  purchasing.  The 
question  was  whether  the  purchase  price  should  be  based  on  the 
value  of  the  physical  property,  or  this  thing,  plus  the  value  as 
a  "going  commercial  concern,"  the  Privy  Council  holding  that 

"  in  the  absence  of  an  express  provision  to  the  contrary,  the  transaction 
which  it  contemplates,  is  the  sale  and  transfer,  with  the  consent  of  the 
encumbrancers  to  the  respondents  of  the  appellants'  commercial  under- 
taking as  a  going  concern ;  not  only  of  the  physical  apparatus  by  which 
they  carry  on  their  business,  but  also  of  their  statutory  powers;  and  that 
the  whole  must  be  included  in  the  calculation  of  the  purchase  money."  ^ 

Sometimes  the  courts  of  America  have  taken  going  value  as  to 
include  an}^  value  that  may  accrue  by  reason  of  good  will  or  fran- 
chises, but  in  other  cases  have  expressly  stated  that  these  other 
items  were  not  included. 

Second. — ^A  very  frequent  use  of  the  term  ''going  value"  is 
that  of  "capitalized  losses,"  namely,  the  capitalization  of  losses 
incurred  during  the  first  few  years  after  a  corporation  begins 
business.  With  comparatively  few  corporations  has  it  been 
found  that  from  the  moment  construction  of  the  physical  plant 
is  complete  and  operation  begins,  the  gross  income  will  be  suffi- 
cient to  provide,  not  alone  the  cost  of  operating  the  property,  but 
in  addition  fixed  charges,  taxes  and  a  fair  return  on  the  invest- 
ment. There  is  usually  a  formative  period  with  every  corpora- 
tion, which  may  extend  over  a  few  months,  or  a  considerable 
number  of  years,  during  which  time,  expenses,  due  possibly  to 
operation  or  probably  by  reason  of  the  necessity  of  providing  for 
depreciation,  and  certainly  to  cover  more  or  less  of  the  fixed 
charges;  and  a  fair  return  on  the  investment  must  be  furnished 
from  other  sources  until  the  gross  income  is  sufficient  therefor. 
This  expense,  cost  or  charge  has  been  recognized,  both  by  the 
courts  and  public  service  commissions,  as  being  as  much  a  part 
of  the  total  sum  going  to  make  up  the  fair  value  of  corporation 

'  Hamilton  Gas  Company,  Ltd.,  vs.  Mayor,  Councillors  and  Burgesses  of 
the  Borough  of  Hamilton,  1910,  App.  Cas.  300. 

^  Perth  Gas  Company,  Ltd.,  vs.  Mayor  and  Councillors  of  the  City  of 
Perth.     Law  Reports,  Aug.  1,  1911,  part  3,  page  506. 


144  VALUATION  OF  PUBLIC  UTILITIES 

property,  as  is  the  physical  plant,  and  therefor  equally  proper 
for  capitalization.  Some  authorities,  while  recognizing  that 
early  losses  are  apt  to  occur  in  the  starting  of  any  corporation, 
conclude  that  such  losses  are  not  properly  a  part  of  capital,  but 
should  be  considered  a  part  of  operating  expense,  to  be  made 
good  by  allowing  somewhat  larger  earnings  at  a  later  period. 
The  Wisconsin  Public  Service  Commission  in  many  of  its 
decisions  has  estimated  and  allowed  the  worth  of  going  value  in 
connection  with  ascertaining  the  reproduction  cost  of  a  total 
property.  The  method  in  brief  is  to  consider  the  operating 
deficits  accruing  through  building  up  a  business  to  a  point  where 
the  gross  income  is  sufficient  to  cover  normal  operating  expenses, 
maintenance,  fixed  charges,  depreciation  and  profit.  Its  basis  of 
reasoning  has  been  most  fully  set  forth  in  its  well-known  Antigo 
Water  Case  decision  and  order,  from  which  the  following  quota- 
tions are  taken: 

"  But  new  plants  are  seldom  paying  at  the  start.  Several  years  are 
usually  required  before  they  obtain  a  sufficient  amount  of  business  or 
earnings  to  cover  operating  expenses,  including  depreciation  and  a 
reasonable  rate  of  interest  upon  the  investment.  The  amount  by 
which  the  earnings  fail  to  meet  these  requirements  may  thus  be  regarded 
as  deficits  from  the  operation.  These  deficits  constitute  the  cost  of 
building  up  the  business  of  the  plant.  They  are  as  much  a  part  of  the 
cost  of  building  up  the  business  as  loss  of  interest  during  the  construc- 
tion of  the  plant  is  a  part  of  the  cost  of  its  construction.  They  are  taken 
into  account  by  those  who  enter  upon  such  undertakings,  and  if  they 
cannot  be  recovered  in  some  way,  the  plant  fails  by  that  much  to 
yield  reasonable  returns  upon  the  amount  that  has  been  expended  upon 
it  and  its  business.  Such  deficits  may  be  covered  either  by  being  regarded 
as  a  part  of  the  investment  and  included  in  the  capital  upon  which  interest 
is  allowed,  or  they  may  be  carried  until  they  can  be  written  off  when 
the  earnings  have  so  grown  as  to  leave  a  surplus  above  a  reasonable 
return  on  the  investment  that  is  large  enough  to  permit  it.  When 
capitaUzed,  they  become  a  permanent  charge  on  the  consumers.  When 
charged  off  from  the  surplus,  they  are  gradually  extinguished.  (These 
facts  alone,  however,  do  not  always  furnish  the  best  or  most  equitable 
basis  for  the  disposal  of  such  deficits.)  Whether  they  should  go  into 
the  capital  account,  or  whether  they  should  be  written  off,  as  indicated, 
are  questions  that  largely  depend  on  the  circumstances  in  each  particular 
case." 

"The  cost  of  developing  a  business  of  waterworks  may  be  made  up 
of  many  different  kinds  of  expenditures It  may  also  include 


FRANCHISES,  GOOD  WILL,  CONTRACTS         145 

losses  to  the  investors  because  of  the  fact  that  the  plants  in  their  earlier 
years  fail  to  earn  enough  to  meet  all  the  requirements  for  operating 
expenses,  including  depreciation  and  a  reasonable  return  upon  the 
investment.  If  the  direct  outlays  for  securing  business  are  charged 
to  operating  expenses  as  thej-  should  be  instead  of  to  the  capital  account, 
then  the  cost  of  acquiring  a  paying  business  would  be  represented  by 
the  deficits  or  by  the  amounts  by  which  the  gross  earnings  fall  short 
of  covering  the  cost  of  operation  as  stated  including  fair  returns  to  the 
investors." 

"  But  while  such  losses  will  have  to  be  met  by  the  investors,  it  is  not 
expected  that  these  sacrifices  will  be  anything  but  temporary.  The 
investors  fully  expect  and  in  most  cases  rightly  so,  that  these  losses 
will  be  made  good  as  soon  as  warranted  by  the  business  of  the  plant. 
They  usually  regard  such  deficits  as  an  additional  investment  upon 
which,  unless  the  whole  amount  is  refunded  to  them  in  some  form, 
they  are  entitled  to  the  same  returns  as  on  the  rest  of  their  capital. 
Unless  they  are  so  compensated  it  is  manifestly  clear  that  no  money 
from  private  sources  is  likely  ever  to  be  invested  for  such  purposes, 
except  perhaps  in  a  few  rare  instances  for  philanthropic  reasons." 

"It  would  seem  further  that  there  is  no  principle  of  justice  upon 
which  the  service  can  be  had  on  any  other  terms." 

"It  thus  appears  that  the  cost  of  building  up  the  business  of  a  plant 
is  in  most  cases  as  unavoidable  as  the  cost  of  the  construction  of  the 
plant  itself;  that  when  such  costs  are  incurred  they  must  be  reimbursed 
in  some  form  by  the  consumers  in  order  that  capital  may  be  secured; 
that  such  reimbursement  is  equitable  as  between  investors  and  con- 
sumers; and  that  this  is  a  just  method  of  dealing  with  such  costs  for 
other  reasons.  If  this  is  sound,  it  also  follows  that  the  cost  of  the 
business  must  also  be  taken  into  consideration  in  determining  the  value 
of  the  plants  for  rate  fixing  purposes." 

"  This  would  seem  to  apply  with  special  force  where  by  law  the  rates 
are  limited  so  as  not  to  yield  more  than  reasonable  returns  upon  the 
investment.  While  such  legislation  may  not  be  a  guarantee  against 
losses  of  any  kind,  it  is  clear  that  if  the  rates  fixed  under  these  laws 
should  not  include  anything  for  the  cost  of  building  up  the  business, 
there  would  be  no  way  in  which  these  costs  could  be  made  good  to  the 
investors.  In  that  event  these  costs  would  become  a  permanent  loss  to 
them;  and  the  consumers,  in  turn,  would  be  relieved  from  paying  a 
reasonable  return  on  a  part  of  the  investment  or  on  the  capital  that  is 
devoted  to  furnishing  them  with  the  service  in  question.  This  is  a  situa- 
tion of  which  the  investors  are  taking  due  notice,  and  which  is  entitled 
to  due  consideration.  If  not  taken  into  account,  it  will  tend  to  keep 
new  capital  from  entering  this  field  as  well  as  to  prevent  exact  justice 
to  capital  which  has  already  entered  the  same.     The  former  would 

10 


146  VALUATION  OF  PUBLIC  UTILITIES 

result  in  hardships  or  inconveniences  to  the  consumers ;  the  latter  would 
apparently  be  unjust  to  at  least  many  of  the  present  investors  in  such 
utilities." 

"They  should  not  include  items  that  have  been  incurred  under  other 
than  usual  conditions,  or  items  that  could  have  been  avoided  by  the 
exercise  of  ordinary  care  and  business  judgment." ' 

The  Wisconsin  Commission  has  repeatedly  reaffirmed  its 
adherence  to  the  rule  thus  laid  down  in  the  Antigo  case. 

In  State  Journal  Printing  Company  vs.  Madison  Gas  &  Electric 
Company,  decided  March  8,  1910,  the  Commission  not  only 
strongly  reiterates  the  rule  laid  down  in  the  Antigo  case,  but 
again  makes  use  of  tables  similar  to  those  used  in  the  earlier  case 
to  determine  the  cost  of  establishing  the  business  (pp.  580-587). 
At  page  585  of  its  opinion  in  the  Madison  case  the  Commission 
says: 

"For  public  utilities  which,  under  both  the  common  and  the  statute 
laAv,  under  normal  conditions  are  only  entitled  to  reasonable  returns 
on  the  investment,  justice  as  well  as  equity  appears  to  demand  that  the 
amounts,  if  any,  by  which  they,  under  ordinary  conditions,  have  failed 
to  earn  such  returns,  should  be  considered  in  fixing  values  and  rates  for 
such  plants.  In  fact,  such  consideration  would  in  most  cases  seem  to 
be  absolutely  necessary  in  order  to  secure  the  capital  required." 

In  Ripon  vs.  Ripon  Light  &  Water  Company,  decided  March  28, 
1910,  the  Commission  applies  the  same  rule  and  prepares  tables 
on  the  same  basis,  reviewing  the  earnings  and  expenses  of  the 
property  during  a  period  of  fifteen  years,  saying  at  page  16: 

"During  a  considerable  portion  of  its  period  of  operation  the  gross 
earnings  of  the  respondent  company  have  not  been  high  enough  to  cover 
operating  expenses,  including  the  promotion  of  business,  depreciation 
and  a  reasonable  return  in  the  form  of  interest  and  profits.  Such  defi- 
ciencies must  be  met  by  the  owners  of  the  property,  either  in  the  form  of 
additional  capital  put  into  the  business,  or  the  absence  of  a  return 
upon  their  investment,  and  can  be  said  to  constitute  an  additional 
investment  necessary  to  building  up  the  business." 

The  same  principle  is  reaffirmed  by  the  Wisconsin  Commission 
in  its  decision  in  the  Chippewa  Falls  Lighting  Company  case, 
decided  June  14,  1910,  quoting  at  length  from  the  Antigo  decision 
(see  pp.  314-315).  In  the  Fond  du  Lac  Water  Company  case 
decided  by  the  same  Commission  August  19,  1910,  the  history  of 

»  Hill  et  al.  vs.  Antigo  Water  Co.  3.     W..R.  C.  R.  623,  711,  712. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         147 

the  property  and  examination  of  its  gross  and  net  earnings  is 
carried  back  over  a  period  of  twenty-four  years  (see  Table  I, 
page  520  of  that  decision),  the  Commission  saying  at  page  459, 
after  stating  the  method  of  computation  of  past  deficits  which 
was  the  same  as  they  applied  in  the  Antigo  case: 

"The  amount  by  which  the  value  of  the  plant  on  August  1,  1909, 
as  thus  computed  exceeds  the  tentative  valuation  of  physical  property 
may  under  this  method  be  termed  the  going  value  of  the  property. 
This  method  of  estimating  the  going  value  follows  quite  closely  the 
methods  discussed  by  this  Commission  in  the  cases  of  Hill  vs.  Antigo 
Water  Company  and  in  State  Journal  Printing  Company  vs.  Madison 
Gas  &  Electric  Company,  and  it  would  seem  that  no  further  discussion 
is  required  herein." 

Such  method  of  fixing  going  value  may  permit  the  inclusion 
in  capitalization  of  such  expenditures  as  are  made  for  furnishing 
electric  fixtures  free  of  cost,  installing  house  wiring,  or  gas  stoves 
at  less  than  cost,  the  donation  of  gas,  electricity  or  water  for 
public  amusement  or  benefit.  Also  the  cost  of  displa}^  advertis- 
ing, canvassing,  or  instruction  of  customers  or  other  expenses 
which  help  develop  income  more  rapidly  than  normal.  The 
best  informed  usually  prefer  that  such  expenses  should  not  be 
capitalized  and  made  a  continuous  burden  on  the  public,  but 
rather  that  they  should  be  included  as  a  part  of  the  operating 
expense,  thus  keeping  down  capitalization.  It  has  been  pro- 
posed that  the  cost  of  holding  the  present  business,  or  such  ex- 
pense as  would  be  included  as  a  part  of  the  normal  conservative 
growth  of  the  business,  should  be  charged  to  operating  expense, 
while  the  cost  of  getting  new  business  should  be  charged  to  capi- 
tal account.  Theoretically,  such  a  division  appears  perhaps 
logical  and  equitable,  but  in  practice  for  most  companies  at  least, 
it  will  be  found  difficult  to  separate  the  costs  so  that  many  feel 
that  the  capitalization  of  any  such  costs,  is  not  conservative 
business  management. 

To  definitely  determine  what  expenditures  are  legitimate  and 
what  part  of  them  are  not,  is  not  always  an  easy  matter.  The 
difficulties  in  the  way  of  doing  this  are  also  increased  by  the  fact 
that  the  early  records  of  the  plants  are,  as  a  rule,  either  inaccessible 
or  incomplete.  But  even  at  this  the  task  is  not  insurmountable, 
while  there  may  be  a  lack  of  data  in  some  cases,  there  may  be  an 
abundance  of  such  facts  in  others.     The  conditions  which  obtain 


148  VALUATION  OF  PUBLIC  UTILITIES 

for  some  plants  may  be  a  fair  indication  of  the  situation  for  others, 
where  the  circumstances  are  similar.  In  any  event,  what  consti- 
tutes the  normal  cost  of  developing  the  business,  like  the  cost  of 
the  physical  value,  the  fair  rate  of  profit  and  other  elements,  is  a 
question  which  can  only  be  determined  by  investigation  of  the 
particular  property  under  consideration. 

"In  addition  to  those  mentioned,  there  is  also  another  element  that 
should  receive  some  consideration  in  fixing  the  cost  of  the  business,  and 
that  is  the  profits  the  plants  have  earned  since  they  reached  a  paying 
basis.  If  these  profits  are  so  large  as  to  be  considerably  above  those 
ordinarily  obtained,  it  is  conceivable  that  strict  justice  between  invest- 
ors and  consumers  might  require  that  these  excesses  should  be  treated 
as  an  offset  to  early  losses,  and  that  in  this  way  all  or  a  part  of  the 
earlier  losses  may  have  been  wiped  out.  In  dealing  with  this  feature 
of  the  situation,  however,  it  should  be  borne  in  mind  that  the  risks 
involved  are  much  greater  at  first  than  later  on,  when  the  adaptability 
of  the  plant  has  been  proven  and  when  its  business  has  been  secured; 
and  that  since  risks  are  one  of  the  leading  elements  that  determine  the 
rate  of  profit,  the  rate  of  returns  to  which  the  investors  and  those  who 
carry  on  the  business  are  entitled  may  be  considerably  higher  during 
the  earlier  and  more  risky  periods  than  is  the  case  later.  Just  how 
much  importance  should  be  attached  to  the  difference  in  the  earnings 
as  between  the  earlier  years  and  later  years,  is  not  clear.  Much  depends 
on  how  the  operating  expenses  including  depreciation,  have  been 
treated,  and  what  sums  have  been  included  therein,  or  excluded  there- 
from. In  this  connection  a  great  deal  may  also  depend  on  such  defini- 
tions as  have  been  placed  on  the  word  "reasonable"  as  appUed  to  the 
rate  of  returns.  These  are  matters,  however,  that  to  a  considerable 
extent,  are  subject  to  proof,  and  may  therefore  be  disclosed  on  the 
proper  kind  of  inquiries."  ^ 

In  order  to  better  illustrate  the  theory  adopted  by  the 
Wisconsin  Commission  in  building  up  the  cost  of  going  value  or 
the  "cost  of  service"  value,  the  accompanying  typical  diagram 
is  introduced.  It  will  be  seen  that  the  first  year  is  wholly  occu- 
pied with  plant  construction,  during  the  second  year  partial 
operation  is  begun  and  extended  until  the  plant  is  wholly  in 
operation  at  the  beginning  of  the  third  year,  from  which  point 
operating  expenses,  interest  on  the  cash  invested,  taxes  and 
depreciation  are  assumed  to  increase  at  a  uniform  rate,  mean- 
while business  expands  normally,  gross   earnings  improve  at  an 

1  Hill  vs.  Antigo  Water  Company  3  W.  R.  C.  R.  623. 


> 

1 


FRANCHISES,  GOOD  WILL,  CONTRACTS         149 

increasing  rate  until  income  gradually  exceeds  expenses  and  a 
profit  is  realized.  During  the  construction  period,  with  little  or 
no  income,  a  deficit  rapidly  accumulates  by  reason  of  accruing 
interest,  taxes  and  depreciation  to  meet  which  money  must  be 
borrowed  at  interest,  further  increasing  the  deficit,  which,  until 
the  time  earnings  equal  operating  expenses,  is  capitalized  as  a 
part  of  the  total  expenditure  necessary  to  create  a  going  property. 
Thus  according  to  the  theory  of  the  Wisconsin  Commission 
utilities  are  entitled  to  recover  early  losses,  not  the  result  of 
mismanagement,  provided  no  more  than  a  fair  return  has  mean- 
while been  earned  on  the  investment. 


- 

y^  ^■^^ 

Interest  on 
Deficit 

^ 

tsM—j L. 

V 

■-Deficit 

— Interest 

1      2 


5      6      7      8      9     10     11    12     13     14 
Years 


Fig.  3. — Illustration  of  the  method  of  computing  going  value,  as  used  by 
the  Wisconsin  Commission. 


The  Supreme  Court  of  Oklahoma  in  the  Pioneer  Telephone  case, 
recognized  the  fairness  and  logic  of  the  method  of  determining 
going  value  used  by  the  Wisconsin  Commission  quoting  from  the 
decision  of  the  Commission  in  the  Antigo  case  and  deciding  that 
the  Oklahoma  Railroad  Commission  erred  in  failing  to  make  a 
similar  allowance,  in  the  case  under  its  jurisdiction.  The  Court 
then  finds  that  the  going  concern  value  of  the  telephone  company 
is  equal  to  20  per  cent,  of  the  cost  of  reproduction  of  its  plant  on 
the  sum  of  which  two  items  the  commission  erred  in  not  permit- 
ting earnings  as  a  fair  return. 

"Subscribers  are  not  obtained  without  expenditure  of  money,  labor 
and  time,  during  which  the  capital  invested  in  the  plant  earns  nothing 
and  often  fails  to  pay  operating  expenses.     The  customers  must  be 


150  VALUATION  OF  PUBLIC  UTILITIES 

connected  with  the  system  of  the  plant,  trained  emploj-ees  must  be 
obtained,  and  a  system  of  operation  must  be  estabUshed.  Few  indus- 
tries, if  any,  involving  an  investment  of  $90,000  or  more,  can  be  made 
self-sustaining  from  the  first  day  of  their  operation.  The  uncontradicted 
evidence  in  tliis  case  discloses  that  appellant's  plant  for  the  years  pre- 
ceding the  first  hearing,  failed  to  produce  revenue  sufficient  for  operating 
expenses,  current  repairs  and  lay  aside  an  amount  for  depreciation. 
During  the  time  of  development  there  is  a  loss  of  money  actually 
expended  and  of  dividends  upon  the  property  invested.  How  shall 
this  be  taken  care  of  ?  Must  it  be  borne  by  the  owner  of  the  plant  ?  Or 
by  the  initial  customers  ?  Or  shall  it  be  treated  as  part  of  the  invest- 
ment or  value  of  the  plant  constituting  the  basis  upon  which  charge 
shall  be  made  to  all  customers  who  receive  the  benefits  from  the  increased 
service  rendering  power  of  the  plant  by  reason  of  these  expenditures  ? 
It  seems  that  the  last  solution  is  the  logical,  just  and  correct  one.  If 
rates  were  to  be  charged  from  the  beginning  so  as  to  cover  these  expendi- 
tures and  earn  a  dividend  from  the  time  a  plant  is  first  operated,  the 
rate  to  the  first  customers  would  be  in  many  instances,  if  not  in  all, 
so  exorbitant  as  to  be  prohibitive  and  would  be  so  at  the  time  when 
the  plant  could  be  of  service  to  them.  On  the  other  hand,  the 
public  cannot  expect  as  a  business  proposition  or  demand  as  a  legal 
right  that  this  loss  shall  be  borne  by  him  who  furnishes  the  service; 
for,  investors  in  public  service  property  make  such  investments  for  the 
return  they  will  yield;  and,  if  the  law  required  that  a  portion  of  the 
investment  shall  never  yield  any  return,  but  shall  be  a  total  loss  to 
the  investor,  capital  would  unwillingly  be  placed  into  such  class  of 
investments,  but  the  law  in  our  opinion  does  not  so  require.  Private 
property  can  no  more  be  taken  in  this  method  for  public  use  without 
compensation,  than  by  any  other  method.  When  the  use  of  the 
property  and  the  expenditures  made  during  the  non-expense  paying  and 
non-dividend  paying  period  of  the  plant  are  treated  as  an  element 
of  the  value  of  the  property  upon  which  fair  returns  shall  be  allowed, 
then  the  burden  is  distributed  among  those  who  receive  the  benefits 
of  the  expenditures  and  the  use  of  the  property  in  its  enhanced  value. "^ 

In  estimating  going  value  from  a  consideration  of  and  allow- 
ance for  a  fair  return  during  early  years  when  same  has  not  been 
earned,  common  sense  and  good  judgment  must  be  used.  In  the 
Coney  Island  and  Brooklyn  Railroad  rate  case,  before  the  Public 
Service  Commission  of  New  York,  First  District,  the  engineer  of 
the  company  submitted  an  estimate  of  the  going  value  of  the 
property  based  on  the  earnings  for  a  period  of  some  sixty  years 
previous.     The  value  of  the  property  at  the  close  of  each  year 

^  Pioneer  Telephone  &  Telegraph  Co.  vs.  Westenhaven.     118  Pacific  354. 


FRANCHISES,  GOOD  WILL,  CONTRACTS         151 

was  taken  separately  and  the  net  earnings  applied  to  the  princi- 
pal, less  the  amount  required  for  a  fair  return,  the  balance  being 
carried  forward  in  the  same  way  that  going  value  is  estimated  by 
the  Wisconsin  Commission.  Thus,  in  the  case  of  the  company 
referred  to,  the  deficiencies  were  carried  forward  from  year  to 
year  at  compound  interest  and  eventually  showed  an  amount 
aggregating  more  than  the  value  of  the  physical  property,  which 
the  expert  claimed  should  be  considered  the  capitalization  upon 
which  a  return  at  present  should  fairly  be  allowed.  This  of 
course  is  carrying  the  matter  to  extremes.  It  can  hardly  be 
argued  that  the  original  Horse  Railroad,  which  had  clearly  demon- 
strated itself  a  business  failure  should  be  added,  investment, 
passed  dividends  and  all,  to  the  value  of  the  electrical  system 
and  the  latter  be  made  to  pay  returns  on  an  investment  which 
had  never  proved  itself  of  value. 

The  criticisms  which  can  fairly  and  logically  be  made  to  the 
method  of  estimating  going  value  adopted  by  the  Wisconsin 
Commission  are: 

(a)  The  reproduction  cost  of  the  physical  plant  is  increased  by 
the  actual  cost  in  the  past  of  building  up  the  present  busi- 
ness instead  of  by  an  estimated  cost  of  reproducing  a  like 
business. 

(b)  The  expenditures  made  in  the  past  in  building  up  the 
present  business  are  usually  assumed  to  have  iDeen  properly 
and  advantageously  made,  which  may  or  may  not  have 
been  the  case. 

(c)  No  scientific  theory  or  definite  rule  has  been  determined 
fixing  the  period  during  which  the  deficits  in  income  shall 
be  permitted  to  be  capitalized,  resulting  in  inequality  as 
between  corporations  and  possible  encouragement  of  mis- 
management and  capitalization  of  unwise  expenditures. 

Third. — Going  value  has  also  been  used  to  mean  the  value  that 
obtains  from  capitalizing  the  present  net  earnings  of  a  corpora- 
tion, i.e.,  the  value  of  a  created  income.  In  this  sense  it  is  closely 
allied  to  good  will  and  may  perhaps  be  fairly  applied  in  determin- 
ing the  value  of  the  business  of  a  private  corporation,  but  has  no 
place  in  consideration  of  value  on  which  to  base  a  fair  return 
when  considering  a  public  utility  corporation  operating  as  a  con- 
trolled monopoly,  for  the  reason  fully  explained  under  ''Good 
Will."     Such  evaluation  based  on  the  total  net  earnings,  would 


152  VALUATIO?^  OF  PUBLIC  UTILITIES 

include  in  going  value,  the  value  of  good  will,  franchise,  etc., 
unless  these  were  first  separately  valued. 

It  has  been  suggested  that  the  modification  of  this  method, 
used  in  determining  "immaterial  properties"  value,  in  the 
appraisal  of  the  railroads  by  the  State  of  Michigan,  namely  the 
capitalization  of  net  earnings  remaining  after  deducting  a  fair 
return  on  the  value  of  the  appraised  physical  property,  is 
erroneous  and  misleading  because  the  same  total  valuation 
would  be  obtained  by  capitalizing  total  net  income  regardless  of 
plant  values.  Moreover  the  method  used  is  based  on  an  assump- 
tion that  income  is  proper,  hence  rates  are  fair  which  is  simply 
basing  values  on  rates,  which  perhaps  proved  a  satisfactory 
method  of  establishing  values  for  purposes  of  taxation. 

The  Supreme  Court  in  the  Kansas  City  Water  Works  case  says 

"The  city  steps  into  possession  of  a  property  which  not  only  has  the 
ability  to  earn,  but  is  in  fact  earning.  It  should  pay,  therefore,  not 
merely  the  value  of  a  system  which  might  be  made  to  earn,  but  that  of  a 
system  which  does  earn." 

Fourth. — Although  the  trend  of  modern  movement  is  toward 
the  reduction  rather  than  the  creation  of  non-physical  values, 
going  values  have  been  allowed,  particularly  in  waterworks 
appraisals,  based  on  the  present  worth  of  estimated  earnings 
including  those  of  future  business  growth. 

The  method  consists  in  estimating  the  present  worth  of  excess 
earnings  of  an  existing  plant  compared  with  those  of  a  hypo- 
thetical plant,  between  the  date  of  valuation  and  the  time  the 
earnings  of  the  assumed  plant  shall  equal  those  of  the  existing 
plant. 

A  very  complete  and  valuable  paper  explaining  this  method  of 
determining  going  value  has  been  jointly  and  recently  presented 
by  two  well-known  and  competent  authorities  on  appraisals, 
particularly  those  relating  to  waterworks,  Mr.  L.  Metcalf  and  Mr. 
J.  W.  Alvord.  As  no  better  exposition  of  this  theory  has  been 
presented,  the  author  has  attempted  to  summarize  this  paper 
and  quotes  therefrom,  at  length. 

Going  value  as  defined  by  Messrs.  Metcalf  and  Alvord  relates 
exclusively  to  "the  cost  of  acquiring  a  given  income,"  being  a 
value  "between"  a  tangible  and  intangible  value,  the  former 
representing  physical  property  and  the  latter,  as  here  used, 
estimated  value,  going  value  being  an  actual  cash  expenditure, 


FRANCHISES,  GOOD  WILL,  CONTRACTS         153 

as  estimated  to  produce  certain  results.  The  present  worth  of 
going  value,  to  be  logically  determined,  must  be  based  on  the 
cost  of  reproduction  and  may  be  estimated  by  determining  the 
difference  in  earning  capacity  between  the  existing  property  and 
a  hypothetical  new  property  which  has  been  called  the  "Com- 
parative Plant."  The  construction  of  the  hypothetical  plant  is 
assumed  to  begin  at  the  date  of  appraisal  and  to  progress  as 
rapidly  as  practicable,  beginning  business  as  completion  of  parts 
will  permit,  and  steadily  acquiring  and  increasing  business  until 
the  total  amount  equals  the  amount  of  business  that  is  estimated 
shall  be  done  by  the  existing  company,  at  its  present  rate  of  prog- 
ress at  that  time  of  equality  in  the  future.  The  estimate  for 
the  existing  plant  is  independently  completed  and  then  the  esti- 
mate for  the  comparative  plant  is  made  on  the  assumption  that  as 
fast  as  plant  construction  permits  the  new  company  takes  the 
business  of  the  old  company,  without  competition,  the  use  of  the 
property  of  the  existing  company  being  discontinued  as  the  new 
plant  is  ready  to  render  service.  Going  value  is,  as  stated  by 
the  authors: 

"The  sum  of  the  present  worths  of  the  annual  excess  in  net  earnings, 
or  return,  from  the  existing  plant,  as  compared  with  those  from  the 
comparative  plant,  in  the  period  of  years  from  the  date  of  valuation 
to  the  time  when  the  earnings  of  the  comparative  plant  can  reasonably 
be  assumed  to  e(iual  those  of  the  existing  plant,  is  then  the  measure  of 
the  going  value  of  the  existing  plants." 

The  matters  to  be  considered  in  figuring  going  value  based  on 
a  comparison  of  an  existing  and  hypothetical  plant  are: 

(a)  The  time  required  to  construct  the  hypothetical  plant. 

(b)  The  time  required  for  the  earnings  of  the  hypothetical  plant 
to  overtake  those  of  the  existing  plant. 

(c)  The  capacity  of  the  existing  plant  in  relation  to  present 
business. 

(d)  The  depreciation  charges  of  each  plant. 

(e)  The  gross  income,  with  rate  of  increase,  for  each  plant. 

(f)  The  operation,  maintenance,  depreciation,  taxes  and  other 
similar  expenses  omitting  return  on  the  investment. 

To  indicate  exactly  the  application  of  the  principles  outlined 
by  Messrs.  Metcalf  and  Alvord,  the  following  example  is  quoted 
from  their  paper  in  the  Transactions  of  the  American  Society  of 
Civil  Engineers,  Vol.  LXXIII. 


154 


VALUATION  OF  PUBLIC  UTILITIES 


APPLICATION  OF  PRINCIPLES  OUTLINED 
Assumptions  as  to  Existing  Plant. — For  the  sake  of  illustration,  and  to 
make  clear  the  principles  which  have  been  discussed,  the  writers  have 
assumed  a  typical  case  in  order  to  show  the  steps  necessary  to  deter- 
mine the  going  value  of  a  large  property  on  the  comparative  method 
herein  outlined. 

ASSUMED  ANNUAL  GROSS  INCOME,  OPERATING 

EXPENSES  AND  NET  INCOME 

FOR  EXISTING  AND  COMPARATIVE  PLANTS 

1910 

1910   1911   1912   1913   1911   1915   1916    1917   1918   1919   1920   1921   1922   1923 


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Fig.  4. 

The  plant  which  has  been  taken  for  illustration  is  an  imaginary  one, 
supposed  to  serve  a  population  of  300,000  persons,  but  care  has  been 
taken  to  make  the  data  consistent  and  conformable  to  figures  found  in 
operation.  This  statement  is  made,  however,  that  the  reader  may  not 
be  misled  into  supposing  that  the  figures  have  been  copied  directly  from 
the  report  of  any  public  or  private  waterworks. 


) 


FRANCHISES,  GOOD  WILL,  CONTRACTS         155 

In  Fig.  4  is  shown  a  forecast  of  tlie  assumed  probable  gross  annual 
income,  net  annual  income  (excluding  depreciation  aijd  fixed  charges), 
and  operating  expenses  (excluding  depreciation  and  fixed  charges),  of 
the  assumed  plant,  called  "the  existing  plant,"  which  is  supposed  to  be 
based  on  the  past  financial  history  of  such  plant,  and  the  assumptions 
contained  in  Table  I. 

It  is  further  assumed  that  the  investment  in  the  physical  part  of  the 
existing  plant  amounted  to  $8,600,000,  at  the  time  of  taking. 

The  problem,  therefore,  consists  in  determining:  first,  the  interest  loss 
during  construction,  and  second,  the  going  value. 

Date  of  Valuation. — The  valuation  of  this  plant  is  assumed  to  be  made 
as  of  January  1,  1910. 

Construction  Period  Required. — It  is  assumed  that  a  period  of  6  years 
— say  from  1910  to  1916 — would  be  reasonabh-  required  to  build  a  new 
comparative  plant  identical  with  the  existing  plant,  as  of  the  date  of 
taking  in  1910. 

Going  Value  Development  Period. — It  is  assumed  that  a  period  of  10 
years  (or,  in  other  words,  4  years  in  addition  to  the  period  of  construc- 
tion) will  be  required  by  the  comparative  plant  to  develop  an  income 
identical  with  that  of  the  existing  plant. 

Beginning  of  Operation. — In  spite  of  the  fact  that  a  6-year  period  has 
been  assumed  to  be  required  to  build  the  comparative  plant,  it  is 
assumed  that  a  prudent  investor  would  plan  his  order  of  construction  so 
as  to  make  available  at  the  earliest  possible  moment  certain  parts  of  the 
comparative  plant,  such  as  the  water  supply  and  distribution  pipe  sys- 
tem, so  that  the  latter  could  be  put  into  commission  and  become  a 
source  of  revenue  at  as  early  a  date  as  practicable.  Obviously,  the 
magnitude  of  the  interest  charges  on  the  comparative  plant,  during  the 
construction  period,  would  be  a  strong  incentive  to  such  a  course  of 
action. 

Character  of  Plant  and  Order  of  Construction. — For  purposes  of  illus- 
tration, it  is  assumed  that  the  plant  under  question  consists  of  a  pond  or 
driven-well  supply,  of  limited  extent,  supplemented  by  a  filtered  river- 
water  supply  derived  through  large  impounding  or  storage  reservoirs, 
involving  the  construction,  not  only  of  a  filter  plant,  but  of  expensive 
impounding  reservoirs,  dam,  and  conduits,  two  pumping  stations,  one 
to  care  for  the  small  pond  or  driven-well  supply,  the  other  to  care  for  the 
main  supply  from  the  impounding  reservoirs. 

The  assumed  order  of  construction  is  shown  in  Table  II,  grouped 
under : 

1.  Distribution  pipe  system ; 

2.  Pond  or  driven-well  supply,  and  sterilizing  plant,  with  pumping 
station; 

3.  Filter  plant,  conduits,  etc.; 


156 


VALUATION  OF  PUBLIC  UTILITIES 


TABLE  I.— GENERAL  STATISTICS  RELATING  TO  ASSUMED 

WATERWORKS  PLANT 

"  The  Existing  Plant " 


Year  ending  December  31 


1910 


Population 

Miles  of  pipe,  all  kinds 

Population  per  mile  of  pipe 

Taps  in  service  (live) 

Per  1000  population 

Per  mile  of  pipe 

Persons  per  tap 

Consumption,    annual,    in    millions 

gallons. 

Daily,  in  millions  of  gallons 

Per  capita,  in  gallons  per  day 

Per  mile  of  pipe,  in  gallons  per  day 

Per  tap,  in  gallons  per  day 

Hydrants  (number) 

Per  1000  population 

Per  mile  of  pipe 


of 


Gross  income  (total) . 


Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  million  gallons  consumption . 


300,000 

480 

625 

40,000 

133 

83 

7.5 

10,950 

30 

100 

62,500 

750 

3,840 

12.8 

8 


51,050,000 

3.50 
2,190 
26.25 
95.90 


330,000 

520 

635 

45,000 

1.36 

86 

7.3 

13,250 

.36.3 
110 
69,800 
807 
4,420 
13.4 
8.5 


$1,190,000 

3.61 
2,290 
26.40 
89.90 


Gross    income,    exclusive    of    hydrant 
'    rentals. 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  mUlIion  gallons 


Cost   of    operation,    exclusive    of   fixed 
charges  and  depreciation. 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  million  gallons   

Percentage  of  gross  income 


Net  income,  exclusive  of  fixed  charges 
and  depreciation. 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  million  gallons 

Percentage  of  gross 


Hydrant  rental  (total) 

Per  hydrant 

Per  mile  of  pipe 

Taxes  (annual) 

Percentage  of  gross  income. 


S896,400 

2.99 
1,870 
22.40 
81.90 


$360,000 


1.20 
750 
9.00 
32.90 

34.3% 


$1,013,200 

3.07 
1,950 
22.50 
76.50 


$402,000 


1.22 
773 
8.94 
30.30 

33.8% 


$690,000 

2.30 
1,440 
17.25 
63.00 

65.7% 


$153,600 
40 

380 
84,000 


$788,000 

2.39 

1,510 

17.50 

59.40 

66.2% 


$176,800 

40 

340 

95,200 


1920 


365,000 

570 

640 

51,000 

140 

88 

7. 

15,980 


16 


43.8 

120 

76,900 

859 

5,130 

14 

9 


$1,296,000 

3.55 
2,270 
25.40 
81.10 


$1,192,320 


3.26 
2,090 
23.40 
74.60 


$430,000 


1.18 
754 

8.44 
26.90 
33.2% 


$866,000 


2.37 

1,520 

16.97 

54.20 

66.8% 


$205,200 

40 

360 

103,680 


8% 


Note. — The  units  have  been  computed  by  slide-rule. 


I 


FRANCHISES,  GOOD  WILL,  CONTRACTS         157 


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158 


VALUATION  OF  PUBLIC  UTILITIES 


4.  Pumping  station  for  enlarged  supply  and  extension  of  same  after 
the  year  1913  by  the  installation  of  additional  pumping  units; 

5,  Storage  dam  and  impounding  reservoirs. 

The  real  estate,  water  rights,  and  rights  of  way  are  assumed  to  be 
distributed  in  the  several  divisions  to  which  they  appertain. 

The  cost  of  engineering  and  contingencies  is  also  included  under  the 
several  individual  items  cited  above. 

The  interest  during  construction,  however,  as  well  as  the  going  value, 
remains  yet  to  be  determined. 

Beginning  of  Operation  of  Different  Portions  of  Comparative  Plant. — 
It  is  assumed  that  by  January  1,  1912,  the  small  supply  from  pond  or 
driven-wells  will  be  available.  The  filter  plant  and  main  pumping 
station  is  assumed  to  be  completed  and  ready  for  service  as  of  January 
1,  1914,  the  additional  pumping  units  installed  thereafter  being  ready 
for  service  between  Januarj^  1,  1915  and  1916.  It  is  assumed  that  on 
or  about  January  1,  1915,  the  storage  dam  and  impounding  reservoirs 
can  be  put  into  service,  though  not  finally  completed  until  January  1, 
1916,  and  that  the  pipe  distribution  system  built  in  any  year  is  available 
for  service  the  following  year. 

Loss  of  Interest  During  Construction. — In  Table  III  has  been  computed 
the  loss  of  interest  during  construction  on  this  plant,  based  directly  on 
the  assumptions  made  as  to  the  order  of  construction  shown  in  Table  II 
and  the  discussion  following,  and  on  the  further  assumption  that  the 
dividing  line  for  the  charges  for  loss  of  interest  on  construction  account 
and  on  operating  account  is  drawn  at  the  point  of  completion  and 
putting  into  service  of  any  revenue-producing  unit  of  the  plant. 

TABLE  III. — COMPARATIVE  PLANT 
Interest  During  Construction 


Total  net  physical  value, 

Average 

Total  net  physical  value 

exclusive  of 

going  value 

amount  on 

Interest 

and  interest  during 

and  interest  during 

which 

on 

construction,  exclusive 

construction 

interest  is 

amoimts 

of  going  value 

Date 

chargeable 
for  one 
full  year 

to  capital 

in 

Column  4 

at  6  per 

cent. 

During 
year 

To  date, 

December 

31 

During 
year 

To  date 

account 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

(7)      ■ 

1910-19H  . 

S800,000 

8800,000 

$400,000 

S24,000 

$824,000 

$824,000 

1912 

1,700,000 

2,500,000 

1,650,000 

99,000 

1,799,000 

2,623,000 

1913 

2,100,000 

4,600,000 

1,550,000 

83,000 

2,183,000 

4,806,000 

1914 

1,900,000 

6,-500,000 

2,650,000 

159,000 

2,059,000 

6,865,000 

191.5 

1,300,000 

7,800,000 

1,4.50,000 

87,000 

1,387,000 

8,252,000 

1916 

800,000 

8,600,000 

500,000 

30,000 

830,000 

9,082,000 

Total  allowance  for  lost  interest-during-construction 

item $482,000 


FRANCHISES,  GOOD  WILL,  CONTRACTS         159 


Thus,  loss  of  interest  during  construction  is  allowed  on  the  average 
amount  of  investment  during  the  year  1910  at  the  rate  of  6  per  cent.,  on 
the  assumption  that  the  work  built  during  that  j^ear  cannot  be  revenue 
producing  until  after  the  year  1911,  pending  completion  of  the  water- 
supplying  works.  Similarly,  interest  is  allowed  during  the  year  1911, 
not  only  on  the  investment  during  the  year  1910,  but  on  the  investment 
during  the  year  1911.  After  January  1,  1912,  however,  the  interest  on 
the  investment  in  pond  or  driven-well  supply  is  assumed  to  be  charged 
to  operating  cost  as  fixed  charges,  and  not  to  capital  account  under  the 
head  of  interest  lost  during  construction,  for  the  reason  that  it  is  assumed 
that  this  portion  of  the  plant,  being  available  through  the  agency  of  the 
pond  or  driven-well  suppl}^  and  the  distribution  pipe  system  built  up  to 
that  date,  is  now  in  the  revpnue-producing  class.  Similarly,  interest 
lost  during  construction  is  charged  to  capital  account  on  the  filter  plant, 
during  the  years  1912  and  1913,  and  thereafter  to  the  operating  ac- 
count as  fixed  charges,  for  the  reason  that  the  filter  plant  is  assumed 
to  be  in  revenue-producing  operation  after  January  1,  1914,  when  it  is 
assumed  to  have  been  completed,  although  the  water-works  plant  as  a 
whole  is  not  assumed  to  be  finished  until  January  1,  1916. 

New  Construction  in  Going  Value  Development  Period  Ignored. — No 
consideration  is  taken  of  the  new  construction  re<iuired  during  the 
construction  and  going  value  development  period,  1910  to  1920,  for  the 
reason  that,  whatever  profit  or  loss  is  involved  thereby  accrues  alike  to 
both  plants  in  the  comparative  method,  and  so  has  no  effect  on  the 
going  value  under  determination. 

OPERATIONS  OF  EXISTING  PLANT 

In  Table  IV  are  shown  the  assumed  operating  statistics  for  the 
existing  plant. 

TABLE  IV.— EXISTING  PLANT 

Annual  Income  and  Expense 


Year 

ending 

December 

31 

(1) 


Gross 
income 

(2) 


Net  income, 

Net  income 

Operation, 

exclusive  of 

applicable 

maintenance, 

depreciation 

Depreciation 

to  fixed 

and  taxes 

and  fixed 

charges  and 

charges 

dividends 

(3) 

(4) 

(5) 

(6) 

5360,000 

5690,000 

S  90,000 

5600,000 

370,000 

710,000 

91,000 

619,000 

380,000 

730,000 

92,000 

638,000 

388,000 

752,000 

93,000 

659,000 

395,000 

770,000 

94,000 

676,000 

402,000 

788,000 

95,000 

693,000 

409,000 

804,000 

96,000 

708,000 

414,000 

821,000 

97,000 

724,000 

420,000 

835,000 

98,000 

737,000 

425,000 

850,000 

99,000 

751,000 

430,000 

866,000 

100,000 

766,000 

1910 i  $1,0.50,000 


1911. 
1912. 
1913. 
1914. 
1915. 
1916. 
1917. 
1918. 
1919. 
1920. 


1,080,000 
1,110,000 
1,140,000 
1,165,000 
1,190,000 
1,213,000 
1,235,000 
1,255,000 
1,275,000 
1,296,000 


160 


VALUATION  OF  PUBLIC  UTILITIES 


Operations  of  Comparative  Plant. — In  Table  V  are  shown  the  assumed 
financial  operations  of  the  new  comparative  hypothetical  plant,  without 
allowances  for  the  income  from  unemployed  capital. 

Income  on  Unemployed  Capital. — In  Table  VI  is  shown  the  first  trial 
computation  relating  to  the  income  on  unemployed  capital.  It  will  be 
remembered  that  it  was  suggested  that,  in  this  method  of  computing 
going  value,  one  should  consider  himself  at  the  parting  of  the  ways, 
with  an  amount  of  capital  in  hand  sufl^cient  to  buy  the  existing  plant — 
covering  in  the  cost  thereof  the  value  of  the  physical  plant,  interest 
during  construction,  going  value,  and  franchise  value — and  follow 
through  the  steps  relating  to  investment  in  the  comparative  plant,  which 
the  capitalist  would  take,  and  the  return  which  he  would  get  in  the  form 
of  interest  on  his  unemployed  capital. 

TABLE  v.— COMPARATIVE  PLANT 
Annual  Income  and  Expense 
(From  Operation,  Exclusive  of  Interest  on  Unemployed  Capital) 


Year 

ending 

December 

31 

(1) 

Gross 
income 

(2) 

Operation, 

maintenance, 

and  taxes 

(3) 

Depreciation 

Net  income 
applicable  to 

Sum  on  which 
it  is  based 

(4) 

Amount  at 
1  per  cent. 

(5) 

fixed 

charges  and 

dividends 

(6) 

1910 

1911 

8      50,000             SI  18.000 

$68,000 

1912 

195,000 

385,000 

575,000 

760,000 

923,000 

1,063,000 

1,175,000 

1,250,000 

1,296,000 

195,000 
255,000 
305,000 
344,000 
372,000 
394,000 
410,000 
422,000 
430,000 

1913 

1914 

1915 

1916 

1917 

1918 

1919 

1920 

S2,123,000 
3,106,000 
6,065,000 
7,152,000 
9,082,000 
9,082,000 
9,082,000 
9,082,000 

$21,000 
31,000 
61,000 
71,000 
91,000 
98,000 
99,000 

100,000 

109,000 
239,000 
365,000 
480,000 
578,000 
667,000 
729,000 
766,000 

Let  it  be  assumed  that  he  could  place  idle  funds  at  a  4  per  cent,  rate, 
except  as  to  the  funds  required  for  the  year's  construction,  on  which  the 
bank  rate  of  interest  is  assumed  to  be  2  per  cent.  For  simpHcity,  let  it 
be  further  assumed  that  on  the  money  expended  during  one  year,  6 
months'  interest  at  2  per  cent,  can  be  obtained  from  the  bank,  corre- 
sponding to  a  2  per  cent,  rate  on  bank  balances  during  the  year. 

Obviously,  the  first  difficulty  with  which  one  is  confronted  is  that  the 
going  value  has  not  yet  been  computed.  The  comparative  physical 
plant  was  assumed  to  have  a  value  of  S8, 600, 000;  the  loss  of  interest 
during  construction  was  found,  by  Table  III,  to  amount  to  $482,000; 
the  total  investment  in  physical  plant,  including  loss  of  interest  during 


FRANCHISES,  GOOD  WILL,  CONTRACTS         161 


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162 


VALUATION  OF  PUBLIC   UTILITIES 


construction  in  the  assumed  existing  plant  and  hence  also  in  the  com- 
parative plant,  is  therefore  19,082,000.  The  going  value,  however,  is 
not  yet  known,  and,  therefore,  must  be  determined  by  a  series  of 
approximate  computations.  The  franchise  is  assumed  herein  to  have 
nominal  value  only. 

As  a  first  trial,  assume  a  going  value  of  $1,800,000.  Under  this 
assumption,  the  total  value  (or  cost  to  the  investor)  of  the  existing  plant 
would  be  as  follows : 

Physical  plant $8,600,000 

Loss  of  interest  during  construction 482,000 

Assumed  going  value 1,800,000 

Total  value $10,882,000 

Therefore,  the  investor  who  has  concluded  to  build  a  new  hypothetical 
plant,  instead  of  to  purchase  the  old  plant,  is  assumed  to  have  in  hand 
the  sum  of  $10,862,000,  as  of  January  1,  1910.  He  is  assumed  further, 
to  adopt  the  same  order  of  construction  for  the  new  comparative  plant 
as  shown  in  Table  II.  Under  these  assumptions.  Tables  VI  and  VII 
result. 


TABLE  VII— FIRST"  TRIAL  GOING  VALUE  COMPUTATION  AS  OF 
JANUARY  1,  1910 


Year 

Total  net  return 

Present  worth  of  excess  earnings  of 
existing  over  comparative  plant 

ending 

December 

31 

(1) 

Existing 
plant 

(2) 

Compara- 
tive plant 

(3) 

Excess  of 

existing 

plant 

(4) 

Period 
of  years 

<5) 

Factor 

at  6  per 

cent. 

(6) 

Amount 
(7) 

Cumula- 
tive 
amount 

(8) 

1910 

1911 

1912 

1913 

1914 

1915 

1916 

1917 

1918 

1919 

1920 

$600,000 
619,000 
638,000 

659,000 
676,000 
693,000 

708,000 
724,000 
737,000 

751,000 
766,000 

$410,000 
275,000 
249,000 

261,000 
316,000 
392,000 

490,000 
581,000 
666,000 

727,000 
762,000 

$190,000 
344,000 
389,000 

398,000 
360,000 
301,000 

218.000 

143,000 

71,000 

24,000 
4,000 

1 

2 
3 

4 
5 
6 

7 
8 
9 

10 

0.9434 
0.8900 
0.8396 

0.7921 
0.7473 
0.7050 

0.6651 
0.6274 
0.5919 

0.5584 

$179,000 
306,000 
326,000 

315,000 
269,000 
212,000 

145,000 

90,000 

-     42,000 

13,000 
2,000 

$179,000 
485,000 
811,000 

1,126,000 
1,395,000 
1,607,000 

1,752,000 
1,842,000 
1,884,000 

1,897,000 
1,899,000 

Resulting  Going  Value . 
Assumed  Going  Value. 


$1,899,000 
1,800,000 


Error  on  First  Trial  Computation. 


$99,000 


FRANCHISES,  GOOD  WILL,  CONTRACTS         163 

Resulting  Going  Value  under  First  Trial  Computation.— In  Table  VII 
is  shown  the  result  of  the  first  trial  computation  of  going  value.  It  will 
be  noted  therein  that  the  going  value,  which  was  assumed  to  be 
$1,800,000,  was  found  to  be  approximately  $1,899,000,  involving  an 
error  in  assumption  of  $99,000. 

Were  a  going  value  of  $1,900,000  assumed  in  the  second  trial  com- 
putation, the  resulting  going  value  would  be  found  to  be  somewhat  less 
than  that  sum,  on  account  of  the  greater  amount  of  interest  accruing 
on  the  unemployed  capital,  which  tends  to  reduce  the  going  value,  the 
other  items  remaining  substantially  the  same. 

Probably  closer  results  would  be  obtained  by  assuming  for  the  second 
trial  computation  a  going  value  of  $1,880,000. 

Recomputation  Unnecessary  for  the  Purpose  of  This  Paper.— As  going 
through  the  somewhat  laborious  process  of  recomputing  Tables  VI  and 
VII  would  not  .shed  any  additional  light  on  the  principles  enunciated, 
it  is  unnecessary,  for  the  purpose  of  this  discussion,  to  follow  through  this 
recomputation.  Enough  has  been  said  to  illustrate  the  principles 
involved  by  the  method  of  computing  going  value  suggested  by  the 
writers. 

For  the  second  trial,  assume  a  going  value  of  $1,880,000.  The 
total  value  of  the  plant  under  discu.ssion  would  then  be: 

Physical  plant $8,600,000 

Interest  during  construction 482,000 

Assumed  going  value  (second  trial) 1,880,000 

Total  value $10,962,000 

In  the  second  trial  computation,  therefore,  it  should  be  assumed 
that  the  builder  of  the  comparative  plant  starts,  as  of  January  1,  1910, 
with  the  sum  of  $10,962,000  in  hand. 

Effect  of  Assumptions  as  to  Order  of  Construction  on  Loss  of  Interest 
during  Construction  Item. — It  will  be  apparent,  from  the  foregoing  discus- 
sion, that  the  larger  the  allowance  for  the  loss  of  interest  during  con- 
struction item,  the  smaller  will  be  the  resulting  going  value,  for  the  rea- 
son that,  the  gross  income  and  operating  expenses  remaining  the  same, 
the  amount  of  unemployed  capital  in  the  hands  of  the  builder,  will  be 
increased.  This,  in  turn,  increases  the  interest  accretions  on  unem- 
ployed capital,  which  have  to  be  deducted  from  the  net  income  of  the 
existing  plant  in  determining  going  value.  The  effect,  therefore,  of 
these  deductions  is  to  decrease  the  going  value.  It  is  obvious,  how- 
ever, that  the  decrease  in  going  value  is  not  ecjual  to  the  increase  in  in- 
terest charges,  for  the  reason  that  the  interest  allowances  on  unemployed 
capital  are  assumed  at  a  lower  rate  than  the  loss  of  interest  during 
construction  item,  and  the  present  worths  of  the  annual  differences 


164  VALUATION  OF  PUBLIC  UTILITIES 

in  net  income  are  taken  in  determining  going  value  as  of  any  given 
date,  instead  of  the  arithmetical  sum  of  those  differences. 

Some  interesting  deductions  and  comments  have  been  made 
by  Mr.  F.  P.  Stearns,  in  attempting  to  ascertain  a  uniform 
figure  which  may  be  used  in  appraising  going  value,  based  on 
certain  data  as  to  the  valuation  of  water-works  property,  includ- 
ing going  value,  furnished  by  Mr.  J.  W.  Alvord. 

"If  one  takes  the  data  from  this  table/  omitting  the  places  having 
less  than  10,000  inhabitants  and  the  one  place  having  a  population  of 
more  than  100,000 — the  former  being  omitted  because  of  their  small 
size  and  the  latter  because  it  is  hardly  possible  that  it  could  be  supplied 
from  its  original  works — and  also  omits  one  case  where  there  was  com- 
petition between  two  rival  plants,  the  following  minimum,  average  and 
maximum  results  are  obtained:" 

Average  population 34,555 

Average  net  value  of  physical  property $774,567 

Average  going  value 133,269 

'  Minimum $1.65 

Average 3 .  86 

Maximum 6.90 


Going  value  per  capita . 


Percentage  of  value  of 
net  physical  property 
represented  by  the 
going  value 


Minimum 10.5 

Average 17.2 

Maximum 34.6 


"Mr.  Alvord  calls  attention  to  the  lack  of  relation  between  the  going 
value  and  the  value  of  the  physical  property,  and  yet  an  average  of  the 
results  attained  in  a  number  of  cases  where  rational  methods  were  used 
will  give  approximately  this  relation  in  the  case  of  a  normal  plant. 

"In  the  typical  illustration  u.sed  by  Messrs.  Metcalf  and  Alvord,  the 
statistics  are  as  follows : 

Population 300,000 

Net  value  of  physical  property,  including  interest 

during  construction $9,082,000 

Going  value 1,897,000 

Going  value  per  capita $6 .  32 

Percentage  of  value  of  net  {physical  property  repre- 
sented by  the  going  value 20 . 9 

"  The  writer  can  easily  conceive  that  there  may  be  an  actual  deficiency 
in  the  returns  during  the  earlier  years  of  the  operation  of  a  normal 

^  Proceedings  American  Water  Works  Association,  1909,  page  206. 


I 
I 


FRANCHISES,  GOOD  WILL,  CONTRACTS         165 

water-works  plant  which  will  equal  $133,000  for  a  plant  valued  at 
$774,000  and  supplying  34,000  people,  but  he  cannot  conceive  that, 
during  the  growth  of  such  a  plant  to  a  net  value  of  $9,082,000,  with 
ability  to  supply  300,000  people,  there  can  be  an  added  deficit  amounting 
to  $1,764,000,  or  any  sum  approximating  this  amount,  due  to  the  devel- 
opment of  the  business  incidental  to  the  additions  made  from  time  to 
time."^ 

Practical  application  of  the  method  hereinbefore  described 
and  illustrated  for  determining  going  value  has  been  in  several 
cases,  notably  that  of  the  Macon  Gas  Light  and  Water  Co.  The 
figures  used  in  the  valuation  for  sole  purposes  of  the  Macon  plant, 
together  with  diagram  illustrating  the  method  of  ascertaining 
the  going  value  of  that  plant  are  given  in  full  in  Chapter  X. 

From  the  preceding,  it  will  be  seen  that  the  suggested  theory 
of  appraising  going  value,  involves  many  assumptions  and  a 
large  forecast  of  the  future,  based  on  the  history  of  a  property, 
which  may  or  may  not  be  a  proper  basis.  The  assumption  that 
the  business  of  any  corporation,  will  continue  to  increase  in  the 
future  along  lines  indicated  by  its  recent  history,  is  perhaps  more 
applicable  to  waterworks  valuations  than  to  most  other  utilities; 
certainly  many  gas,  electric  light  and  railway  companies  would 
object  to  any  such  proposed  method  of  determining  their  going 
values.  Any  predication  of  future  profits  on  the  previous  rate 
of  increase  in  business,  in  America,  must  not  ignore  the  fact  of 
the  recent,  rapid  increase  in  population  of  the  cities  which  may 
have  caused  a  greater  income  to  any  given  utility  than  the  normal 
increase  from  territory,  already  served. 

To  figure  that  going  value  can  be  determined  from  the  con- 
sideration of  the  actual  gross  and  net  incomes  in  past- years, 
assumes  that  past  rates  have  been  fair,  which  may  or  may  not 
have  been  the  case. 

The  method  of  determining  going  value  under  consideration, 
omits  any  proper  consideration  of  the  deficits,  if  any,  which 
occurred  during  the  early  history  of  the  corporation,  and  such 
deficits,  as  explained  in  the  preceding  pages,  is  the  basis  of  going 
value  recognized  and  allowed  for  by  the  Wisconsin  Commission 
and  other  authorities. 

'Transactions  American  Society  of  Civil  Engineers,  Vol.  LXXIII,  Sept., 
1911,  page  365. 


166  VALUATION  OF  PUBLIC  UTILITIES 

Contracts. — ^Although  the  Public  Service  Commissions  have, 
as  a  rule,  denied  the  right  of  capitalization  of  contracts  between 
corporations  and  public  bodies,  such  as  franchises  and  licenses, 
beyond  the  actual  cost  legitimately  extended  in  obtaining  them, 
they  may  be  capitalized  under  certain  circumstances.  The 
Supreme  Court  in  the  well-known  Consolidated  Gas  case  al- 
lowed the  value  of  S7, 500,000  for  franchise.  The  Public  Service 
Commission  of  St.  Louis,  in  the  appraisal  of  the  property  of  the 
Union  Electric  Light  and  Power  Company,  capitalized,  at 
8  per  cent.,  the  rentals  saved  through  an  agreement  with  the 
local  telephone  company  to  the  use  of  the  latter's  poles,  allowing 
S80,000  therefor  in  the  value  of  the  property  of  the  Light  and 
Power  Company. 

Utility  corporations  very  often  have  sought  to  capitalize 
the  net  returns  from  profitable  contracts.  Ordinarily,  such 
capitalization  is  not  properly  allowed  on  the  ground  clearly  set 
forth  in  a  recent  decision  of  the  Public  Service  Commission  of 
New  York. 

"The  contention  of  the  company  as  represented  by  the  testimony  of 
this  witness  in  substance  is  that  the  profits  from  this  contract  for  its 
remaining  life  shall  be  capitalized,  that  the  amount  thus  reached  shall 
be  added  to  the  fair  value  of  its  i^roperty  and  that  the  rates  shall  be 
such  as  will  provide  a  fair  return  thereon.  In  other  words,  the  city 
or  the  tax-payers  must  pay  an  exorbitant  price  for  street  lighting,  and 
yet  the  general  consumers  must  pay  enough  to  yield  an  ample  return 
(10  per  cent,  is  urged)  upon  the  capitalized  value  of  such  abnormal 
profits,  capitalized  upon  a  basis  of  4  1/2  or  5  per  cent.  The  absurdity 
of  such  a  contention  is  apparent.  Paraphrased,  it  is  that  the  more 
the  city  pays  the  more  the  consumer  must  pay.  If  there  is  any  relation- 
ship between  these  two  factors,  it  is  that  the  more  the  city  pays,  the 
less  the  consumer  should  pay,  and  this  has  been  recognized  in  many 
franchises  for  water  and  lighting  plants.  Indeed,  the  original  contract 
and  its  history  indicate  that  street  lighting  and  the  price  obtained 
therefor  have  always  been  very  important  factors,  and  at  the  beginning 
were  the  chief  concern  of  the  company.  Apparently,  the  original  plant 
was  built  principally  with  a  view  to  this  business,  and  the  contract  was 
a  very  important  inducement  to  the  company  to  begin  operation.  It 
is  obviously  unfair  that  this  very  contract  should  be  used  to  make  the 
I^ublic  pay  a  higher  rate  than  they  otherwise  would. 

"The  argument  of  the  company  proves  too  much,  for,  if  it  is  correct, 
it  could  be  argued  that  every  contract  should  be  similarly  treated.  The 
public  lighting  contract  resembles  other  contracts  between  company  and 


FRANCHISES,  GOOD  WILL,  CONTRACTS         167 

consumers.  All  are  property,  and  presumablj-  all  are  profitable.  Those 
that  are  could  be  capitalized  if  this  one  may,  and  the  more  profitable 
they  are,  the  higher  must  the  rates  to  others  be  placed.  Conversely, 
if  any  one  should  not  be  profitable,  the  capitalized  loss  should  be 
subtracted  from  the  fair  value  of  the  other  "property,"  and  the  rates 
lowered  accordingly. 

"It  should  be  noted  further,  that' the  company  does  not  claim  that 
the  contract  itself  represents  any  investment  or  that  any  deposit,  fee  or 
payment  was  required  by  the  authorities. 

"The  Commission  can  find  no  reason  in  law  or  equity  which  would 
justify  the  capitahzation  of  the  street  lighting  contract  and  the  inclusion 
of  such  capitalization  in  the  'fair  value'  upon  which  the  company  is 
entitled  to  earn  a  fair  return  from  the  sale  of  gas  to  general  consumers. 
It  is  unnecessary,  therefore,  to  consider  the  methods  of  determining  its 
value."  ^ 

1  Case  1273,  Mayhew  vs.  Kings  County  Lighting  Company,  Decision  dated 
October  20,  1911,  PubHc  Service  Commission  of  New  York,  First  District. 


CHAPTER  VIII 
DEPRECIATION 

General. — There  is  to-day  probably  no  subject  requiring  more 
illumination  and  coordination  by  the  engineering  profession  than 
that  of  depreciation.  The  recent  generally  recognized  necessity 
on  the  part  of  individuals  and  corporations,  and  the  increasingly 
insistent  demands  by  commissions,  legislatures,  and  courts  for 
proper  allowances  covering  the  reduction  in  worth  of  physical 
properties — be  it  more  or  less  rapid — has  resulted  in  a  divergence 
of  thought  and  a  lack  of  uniformity  of  practice  that  is  bewildering. 

The  important  and  wide  use  actually  made  of  depreciation  both 
in  figuring  operating  expenses  and  net  earnings,  as  well  as  in  the 
determination  of  present  values  of  physical  properties,  through 
appraisals,  for  purposes  of  taxation,  rate  making,  capitalization 
or  sale,  make  the  subject  of  paramount  importance  to  the  engi- 
neer, so  that  the  almost  total  absence,  not  alone  of  an  approved 
theory  of  depreciation,  but  even  the  marked  meagreness  of 
authoritative  literature  on  the  subject,  is  striking.  While  certain 
methods  have  been  developed  and  some  general  principles  have 
been  widely  accepted,  nevertheless,  trustworthy  engineering  data 
on  depreciation  are  exceedingly  scarce,  the  application  of  methods 
of  estimating  depreciation  varies  widely  and  even  the  terms 
employed  are  used  in  a  vague  and  contradictory  manner. 

It  must  be  admitted  that  where  engineers  of  experience,  good 
judgment  and  integrity,  appointed  even  by  opposite  "sides" 
may  be  expected  to  approximately  agree  on  the  ''original  cost" 
or  the  "cost  to  reproduce  new"  they  differ  much  more  widely 
in  attempting  to  determine  depreciation.  This  in  part  arises 
from  honest  differences  of  opinion,  as  the  problems  are  not  possi- 
ble of  exact  mathematical  solution  and  the  gradations  from  one 
class  of  depreciation  to  another  are  frequently  so  gradual  as  to  be 
barely  distinguishable;  and  yet,  a  consideration  of  what  deprecia- 
tion— if  any — has  taken  place  in  the  physical  property  of  every 
corporation  must  be  had,  in  order  to  obtain  a  safe — though  it 
may  be  very  approximate — indication  as  to  proper  or  improper 
capitalization. 

168 


DEPRECIATION  169 

"Absolute"  and  "Theoretical"  Depreciation. — Before  under- 
taking to  discuss  proper  methods  of  estimating  and  allowing 
for  depreciation,  it  is  essential  to  have  clearly  in  mind  just 
how  depreciation  actually  takes  place  and  in  what  way  it  effects 
physical  property. 

Where  property  is  no  longer  of  service,  it  must  be  depreciated 
down  to  the  value  at  which  it  may  be  sold,  even  though  that 
value  is  as  low  as  scrap  value.  On  the  other  hand,  apparatus 
that  is  in  use  and  rendering  a  service  economically,  may  for  the 
purpose  for  which  it  was  intended,  be  as  valuable  as  when 
originally  installed,  although  its  age  may  be  approaching  the 
limit  of  its  life.  Take  for  example  a  steam  engine  which  though 
having  been  in  use  for  the  greater  part  of  its  estimated  life  is, 
through  proper  maintenance,  in  as  good  condition  to  render 
service  as  at  any  time  in  its  history.  If  its  annual  maintenance 
charge  is  no  greater  than  in  the  earlier  years  of  its  history,  its 
"service  value"  to  the  company  as  a  going  piece  of  property 
is  as  great  as  when  first  installed. 

What  then  do  we  mean  by  depreciation?  Reference  to  Fig.  5 
indicates  graphically  several  ways  in  which  depreciation  actually 
takes  place,  as  well  as  usual  methods  heretofore  adopted  in 
considering  and  evaluating  depreciation. 

Assume  that  a  given  piece  of  physical  property  has  an  esti- 
mated life  of  twenty  years,  represented  by  the  abscissa  0  B,  and 
that  it  has  a  given  value  in  dollars,  shown  by  the  length  of 
the  ordinate  0  A.  Let  the  ordinate  0  C  represent  the  worth  in 
dollars  of  the  apparatus  as  scrap  or  junk,  then  the  abscissa  C  D 
will  represent  the  scrap  value  throughout  the  life.  This  line 
is  usually  approximately  a  straight  line,  deviating  therefrom 
simply  by  fluctuations  in  the  value  of  scrap  material,  which  is 
usually  w^ithin  fairly  narrow  limits.  The  point  D  is  the  value 
of  the  apparatus  in  question  at  the  end  of  its  life.  It  may  reach 
this  value  through  any  one  of  several  methods  of  depreciation, 
shown  graphically  by  the  curves  No.  1,  2,  3,  4,  5  and  6. 

Curves  1,  2  and  6  may  be  said  generally  to  represent  "  absolute 
depreciation";  and  curves  3,  4,  5    "theoretical  depreciation." 

Considering  "  absolute  depreciation,"  curves  1  and  2  represent 
the  values,  during  any  period  of  their  lives,  of  most  pieces  of 
physical  property,  determined  from  the  standpoint  of  bargain 
and  sale  for  use  elsewhere.  The  salable  value  of  new  apparatus 
depreciates  very  rapidly  from  the  moment  installed  and  then 


170 


VALUATION  OF  PUBLIC  UTILITIES 


gradually  during  the  remainder  of  its  life  down  to  "  scrap  value." 
The  values  thus  illustrated  are  independent  of  the  service  for  the' 
particular  installation  for  which  the  apparatus  has  been  pur- 
chased and  installed.     Curve  1  may  fairly  represent  the  worth 
of  certain  pieces  of  property  such  as: 

a.  Special  machinery,  the  value  of  which,  for  use  in  connection 
other  than  that  for  which  it  has  been  installed,  would  necessitate 


such  a  large  expenditure  for  modification  of  design  to  make  it 
useful  elsewhere  that  little  more  than  scrap  value  can  be  obtained 
from  same. 

6.  Property  the  cost  of  removing  which,  compared  to  its  cost 
new,  is  relatively  high;  for  example,  ties  for  track,  or  wooden 
poles  of  a  transmission  line. 

Curve  2  represents  sales  value  for  more  easily  transported 
property,  as  for  example  the  rolling  stock  or  synchronous  con- 
verters of  a  street  railway  system  or  transformers  and  meters  of 
a  lighting  company. 


DEPRECIATION  171 

The  classes  of  depreciation  indicated  by  the  curves  1  and  2 
might  properly  be  called  salvage  values  and  approximate  scrap 
or  junk  values,  the  principal  difference  being  the  property  is  sold 
for  what  it  is  worth  as  a  unit  rather  than  for  its  dismembered 
elements.  It  will  be  evident  at  once  that  depreciation  of  these 
classes  cannot  fairly  be  used  in  determining  the  value,  on  the 
basis  of  barter  and  sale  in  the  general  market,  of  the  physical 
property  of  an  operating  entity.  That  this  is  true  and  the  view 
taken  by  the  courts,  will  be  evident  from  consideration  of  the 
decisions  in  the  Consolidated  Gas  and  other  similar  cases  and 
even  in  the  Knoxville  Water  case,  which  is  generally  considered 
the  most  radical  decision  in  the  way  of  depreciating  physical 
value. 

Curve  6  indicates  depreciation  due  only  to  wear  and  tear  until 
just  before  the  close  of  life,  at  which  time  other  classes  of  dete- 
rioration may  appear.  The  curve  is  based  on  the  assumption 
that  the  apparatus  in  question  will  be  used  for  the  purpose  for 
which  it  was  installed,  throughout  its  life,  and  being  maintained 
in  good  operating  efficiency,  100  per  cent.,  is  just  as  good  for  the 
purpose  of  use  as  the  day  it  was  installed,  aside  from  such  slight 
deterioration  as  results  from  wear  and  tear.  That  is,  the  value 
of  the  apparatus  or  construction,  being  used  for  its  original 
purpose,  is  equal  to  its  cost,  new  or  original,  less  the  evaluation 
of  the  wear  which  has  taken  place;  for  example,  a  few  tubes  in  a 
boiler  might  be  so  badly  burned  as  to  render  the  boiler  unfit  for 
service.  The  value  of  the  boiler  as  a  whole  in  its  assumed  con- 
dition is  practically  worth  little  more  than  scrap,  but  by  the 
expenditure  of  a  few  dollars  in  renewing  the  burned-out  tubes 
the  value  of  the  unit,  say  for  the  purpose  of  original  installation 
and  use,  is  equal  to  the  value  of  a  new  boiler.  In  any  large 
system  there  is  constantly  a  large  number  of  parts  always 
approaching  the  time  of  renewal.  At  any  given  instant  of 
appraisal  some  such  parts  will  be  found  completely  worn  out  and 
the  value  of  their  replacement  must  be  deducted  from  the  cost 
new  in  order  to  obtain  the  real,  actual  and  "absolute"  deprecia- 
tion at  the  instant  of  appraisal.  But  assuming  the  property  as 
a  whole  is  kept  in  first-class  operating  condition,  that  there  is  no 
inadequacy,  obsolescence,  or  deferred  maintenance  and  ignoring 
such  slight  deterioration  as  results  from  wear  and  tear  at  any 
given  instant  which  may  be  apparent  in  detail  parts  in  the  sys- 
tem, the  depreciation  effecting  the  value  of  the  plant  for  the 


172  VALUATION  OF  PUBLIC  UTILITIES 

purpose  installed  may  be  considered  nil  practically  throughout 
its  life,  as  an  operating  property.  In  a  given  unit  just  before 
the  close  of  life  other  classes  of  depreciation  than  wear  and  tear 
may  set  in  or  deferred  maintenance  may  be  allowed  to  appear, 
in  which  case,  of  course,  depreciation  must  be  considered,  but 
otherwise  the  value  of  the  property  for  its  original  use  is  equal  to 
the  cost  to  reproduce  new,  and  it  is  the  real  value  of  its  physical 
property  to  a  "going  concern."  This  value  or  its  equivalent  is 
that  generally  allowed  in  ''purchase  and  sale  transactions,"  and 
has  been  recognized  by  public  service  commissions  and  legal 
authorities. 

"If  the  present  value  exclusively  were  to  be  taken  as  the  basis, 
respondent  would  not  receive  credit  for  having  installed  any  part  of 
its  plant  at  full  cost.  The  present  value,  as  of  June  30,  1908,  must, 
therefore,  be  increased  by  the  amount  of  the  estimated  depreciation  on 
that  part  of  the  plant  which  the  company  installed  new."^ 

"Of  the  physical  plant  alone,  the  most  equitable  valuation  for  rate- 
making  purposes  appears  to  be  best  represented  by  the  original  cost  of 
the  plant  and  by  the  cost  of  reproducing  it."^ 

This  "service  value"  would  also  seem  to  be  recognized  by  the 
courts  both  in  rate  cases  and  in  determining  valuations  for  sale.^ 

"Probably  a  fair  statement  would  be  that  the  physical  value  of  the 
plant  is  its  value  as  a  performing  plant  for  the  purposes  for  which  it  was 
designed."* 

If  any  contrary  position  were  assumed,  namely,  that  only 
"sales  value,"  indicated  under  most  favorable  circumstances 
by  curves  1  and  2,  were  to  be  used  in  determining  present  value, 
then  a  large  portion  of  every  going  property  would  be  practically 
valueless  the  day  after  construction  and  installation  was  com- 
pleted, because  the  expense  of  removal  would  amount  to  more 
than  the  cost  of  new  in  the  open  market:  for  example,  ties  in  a 
railway  property;  foundations  and  settings  for  machinery;  pipe, 
deeply  buried;  cross-arms  and  many  wooden  poles. 

^  F.  B.  L.  Fullmer  vs.  Wausau  Street  Railroad  Co.,  Railroad  Commission 
of  Wisconsin,  April  1,  1910. 

^  G.  W.  Hill  et  al  vs.  Antigo  Water  Company,  Railroad  Commission  of 
Wisconsin,  August  3,  1909. 

^  City  of  Omaha  vs.  Omaha  Water  Co.  118  U.  S.,  202.  Wilcox  vs.  Con- 
soHdated  Gas  Co.,  212  U.  S.,  19. 

*  Columbus  Railway  &  Light  Co.  vs.  City  of  Columbus,  Circuit  Court 
U.  S.     Southern  District  of  Ohio,  report  of  Master,  page  34. 


DEPRECIATION  173 

The  classes  of  depreciation  above  discussed  are  going  on  con- 
stantly in  any  physical  installation.  They  are  at  work  and  in 
evidence  at  any  time  despite  the  honest  effort  and  even  extrav- 
agant expenditure  of  the  management  to  provide  against  and 
forestall  depreciation.  Property — except  real  estate  or  road 
bed — cannot  usually  be  maintained  at  100  per  cent,  of  its  original 
value  and  ultimate  economy  seeks  only  100  per  cent,  operating 
efficiency.  The  complete  physical  plant  of  a  going  property 
would  not  ordinarily  have  a  higher  ser\-ice  value  than  90  or  95 
per  cent.,  although  it  is  conceivable,  in  case  of  a  water  power  or 
other  property  including  a  large  amount  of  real  estate  the  value 
of  which  had  risen  rapidly,  the  service  value  might  be  100  or 
110  per  cent.  On  the  other  hand,  the  realizable  sales  value  of 
a  property  might  be  as  low  as  20  or  30  per  cent,  or  even  less. 

There  is  considerable  undue  importance  attached  to  the  ratio 
of  present  value  to  reproduction  cost  new  as  expressed  in  per- 
centage in  connection  with  appraisal  work.  Many  properties 
that  have  been  appraised  have  been  found  to  have  present  values 
of  from  75  to  85  per  cent,  of  the  replacement  cost,  but  that  is  no 
reason  why  such  figures  must  necessarily  be  found  in  any  new 
appraisal.  If  the  property  under  consideration  has  been  largely 
renewed,  the  percentage,  particularly  of  a  railroad,  would  run 
higher  than  the  figures  given.  On  the  other  hand,  it  is  con- 
ceivable that  a  gas  property  in  existence  for  a  period  of  years 
and  still  giving  satisfactory  service  to  the  public,  might  show 
figures  considerably  below  those  quoted. 

\Yith  regard  to  keeping  and  accumulating  of  "  depreciation 
funds"  or  "reserve  funds"  as  they  have  been  called,  at  first 
thought  and  superficially,  it  would  seem  that  the  sum  of  the 
plant  value  (the  present  value  determined  by  appraisal)  and 
the  depreciation  fund  (where  one  is  necessary)  should  at  a 
given  time  equal  the  replacement  cost,  but  as  the  depreciation 
fund  will  have  been  based  on  original  cost  which  may  be  quite 
different  from  replacement  cost,  the  depreciation  fund  in  that 
case  will  not  equal  necessarily  the  difference  between  present 
and  replacement  values.  As  a  property  kept  in  good  operating 
condition  will  ordinarily  not  be  found  to  be  in  a  condition  below 
from  75  to  85  per  cent,  of  the  cost  of  reproduction,  a  fund  larger 
than  15  to  25  per  cent,  would  never  be  required,  even  on  the 
theoretical  basis  proposed  by  some  engineers  and,  as  a  practicable 
matter,  a  sum  equal  to  from  3  to  5  per  cent,  of  the  original  value 


174  VALUATION  OF  PUBLIC  UTILITIES 

would  ordinarily  provide  a  fund  for  emergencies  which  would  be 
amply  sufficient  for  a  property  uniformly  maintained. 

In  contradistinction  to  determination  of  present  value  by  the 
use  of  depreciation  expressed  in  the  curves  1,  2  and  6,  which  may 
be  termed  "absolute,"  the  curves  3,  4,  and  5  indicate  several 
classes  of  "theoretical"  depreciation  which  have  been  quite 
widely  used  in  some  cases  for  estimating  present  values,  but 
more  often  for  determining  the  yearly  theoretical  deterioration 
for  purposes  of  establishing  depreciation  funds,  which,  however, 
is  quite  a  different  subject.  Making  a  theoretical  estimate  of 
the  probable,  future,  average,  annually  accruing  deterioration  of 
certain  property  to  provide  an  item  in  book-keeping  accounts  of 
operating  expense  has  nothing  whatever  to  do,  in  making  an 
appraisal,  wuth  fixing  the  definite  amount  of  absolute,  actual  or 
accrued  depreciation  which  depends  upon  the  present  condition 
of  physical  property,  determinable  from  inspection  and  not  upon 
historical  documents,  depreciation  funds,  or  disputed  theoretical 
conclusions.  Nevertheless,  the  erroneous  application  of  rates  of 
depreciation  in  the  attempt  to  determine  present  commercial 
values  for  purposes  of  capitalization  is  fairly  common,  one  of 
the  most  notable  cases,  because  of  the  large  amounts  of -money 
involved,  being  that  of  the  Public  Service  Commission  of  New 
York,  First  District,  in  the  matter  of  the  Third  Avenue  Railroad 
Reorganization.  ^ 

These  three  curves  3,4,  and  5  represent  classes  of  depreciation 
which  seldom,  if  ever,  occur  in  practice  but  are  convenient  for 
purposes  of  estimate,  particularly  curve  3,  which  represents 
what  is  called  "straight  line  depreciation."  As  indicated,  it 
assumes  a  gradual  and  constant  reduction  in  the  value  of  prop- 
erty throughout  its  life.  The  significance  is  that  if,  from  the 
cost  of  apparatus,  the  value  to  be  obtained  at  the  end  of  its  life, 
namely,  the  scrap  value,  is  deducted,  the  remainder  divided  by 
the  assumed  life,  in  years,  of  the  apparatus,  will  give  the  amount 
in  dollars  to  be  laid  aside  annually  to  accumulate  a  fund  sufficient 
to  replace  the  property  at  the  end  of  its  life  without  interest. 

Curve  4  is  closely  related  to  curve  3;  the  annual  depreciation 
fund,  however,  being  less  because  it  is  assumed  that  the  uniform 
amount  of  money  laid  aside  annually  during  the  life  of  the  prop- 
erty will  be  put  out  at  interest  and  compounded  so  that  owing 

1  Case  1134,  Opinion  of  Public  Service  Commission,  First  District,  New 
York,  Disapproving  Plan  of  Reorganization,  July  29,  1910. 


DEPRECIATION  175 

to  the  accumulation  of  interest  the  amounts  annually  laid  aside 
will  be  less  than  in  the  case  of  "straight  depreciation."  Curve 
4  is  called  the  "sinking  fund"  method. 

Curve  5,  a  modification  of  curve  4,  is  based  on  the  assumption 
that,  instead  of  laying  aside  a  regular  amount  annually  and  com- 
pounding, the  amount  laid  aside  will  be  small  at  first,  gradually 
increasing  in  amount  as  the  earning  power  of  a  property  increases, 
as  it  generally  does,  with  its  life.  These  amounts  are  then 
assumed  to  be  put  out  at  compound  interest  so  as  to  aggregate 
original  cost  of  the  apparatus  at  the  end  of  its  life.  No  general 
rule  has  been  developed  as  to  the  proper  amounts  to  begin 
laying  aside  or  in  what  proportion  they  shall  increase;  but  it  is 
clear  that  the  smaller  are  the  amounts  in  the  beginning  the  larger 
they  must  be  toward  the  end  of  the  life  of  the  apparatus. 

This  latter  plan  of  providing  depreciation  funds  has  the  advan- 
tage of  more  nearly  proportioning  the  annual  depreciation 
payments  in  accordance  with  revenue,  and  for  most  pieces  of 
property  will  more  closely  approximate  the  deterioration  actually 
taking  place. 

A  fourth  plan  of  determining  ''theoretical"  depreciation  has 
been  used  to  limited  extent.  It  consists  in  assuming  a  given 
life  for  the  property  in  question,  ascertaining  the  annual  rate 
of  depreciation  and  then  applying  that  rate  uniformly  to  the 
principal  diminished  in  amount  each  year  by  the  deduction  for 
deterioration.  For  example,  if  the  principal  invested  were 
$2000  and  the  rate  assumed  is  10  per  cent.,  the  amount  charged 
off  for  depreciation  the  first  year  would  be  S200,  leaving  the 
principal,  S1800  on  which  10  per  cent,  or  S180  would  be  charged 
off  the  second  year,  and  $162  the  third  year,  etc.;  thus  the  amount 
charged  off  becomes  progressively  less  and  the  life  of  the  property 
'becomes,  theoretically  at  least,  infinite.  Of  course  this  method 
can  be  modified  from  the  "straight  line"  depreciation  illustra- 
tion  used   above  to   the   "sinking  fund"    method,   if   desired. 

From  the  preceding  it  will  be  seen  that  any  one  of  these  four 
methods  of  estimating  depreciation  is  based  on  absolutely  arbi- 
trary assumptions.  Practically  there  is  no  more  logical  reason 
per  se  why  the  fund — if  necessary — to  replace  the  property  at 
the  end  of  its  life  should  be  provided  in  any  one  of  the  several 
methods  suggested  by  the  curves  rather  than  in  any  other  of  the 
several  methods.  Each  method  will  accomplish  the  same  result, 
but  it  will  be  seen  at  a  glance  that  in  applying  curves  3,  4  or  5, 


176  VALUATION  OF  PUBLIC  UTILITIES 

the  amounts  to  be  laid  aside  annually  will  vary  considerably,  and 
to  that  extent  effect  net  income;  similarh',  the  effect  on  the 
worth  of  the  owner's  investment  will  also  vary  with  the  curve 
used,  being  appreciably  less  for  "straight  line"  depreciation. 
Where  the  lives  of  property  considered  are  relatively  short,  the 
result  of  using  any  one  of  these  three  curves  is  less  pronounced; 
but  where  the  lives  are  long,  running  to  50  or  100  years,  the 
difference  for  the  major  portion  of  their  lives  is  marked.  The 
fourth  plan  suggested  has  not  the  advantage  of  being  sound 
theoretically  or  advantageous  practically. 

The  "straight  line"  method  of  depreciation  has  been  more 
largely  used  than  any  other  probably  because  the  lives  of  much 
apparatus  is  brief;  and,  furthermore,  the  application  of  this 
method  is  the  most  simple,  direct,  and  easily  understood,  and 
hence  favored  by  many  who  are  non-technical  men,  and  natu- 
rally incline  toward  the  more  easily  appreciated  elements  of  the 
questions  which  they  are  compelled  to  consider  and  discuss. 

There  are  three  other  methods  of  determining  the  depreciated 
value,  that  is  the  present  value,  of  physical  property  which 
should  be  mentioned. 

The  first  consists  in  estimating  the  cost  of  purchasing  and 
installing  second-hand  or  used  apparatus  of  the  type  and 
character  of  that  installed  and  equivalent  for  the  same  work. 
The  difficulty  of  carrying  out  this  method  in  practice  is  the 
impracticability  of  finding  duplicate  used  apparatus  and  obtain- 
ing fair  or  uniform  standards  of  price  thereon. 

The  second  proposal  of  some  authorities  is  that  the  depreci- 
ated value  of  a  plant  should  be  determined  by  comparison  with  the 
cost  of  a  most  modern  installation  designed  to  do  the  same  work. 
The  impracticability  of  this  theory  arises  from  (a)  the  inability 
of  the  respective  parties  interested  to  agree  on  what  is  the  proper 
theoretical  plant;  (b)  the  assumption  that  old  property  should 
always  be  renewed  regardless  of  its  usefulness  or  cost  of  its 
replacement.  This  method  has  apparently  received  some 
encouragement  from  the  courts,  as  indicated  by  the  quotation 
from  the  decision  in  the  Cedar  Rapids  case,  referred  to  under 
"Present  Value." 

A  third  method  of  ascertaining  present  value  is  to  make  an 
estimate  of  the  cost  of  reproducing  the  physical  property  new 
and  deducting  therefrom  the  estimated  expense  of  putting  the 
existing  property  in  a  condition  equal  to  new.     The  difficulty 


DEPRECIATION  177 

of  determining  present  condition  compared  with  new,  and  the 
cost  of  the  changes  offer  problems  on  which  there  can  seldom  be 
found  agreement. 

None  of  the  three  methods  just  mentioned  above  are  generally 
favored. 

As  indicating  the  possible  error  in  attempting  to  estimate 
"theoretical"  depreciation,  it  is  frequently  found  that  the 
length  of  life  assumed  has  been  greatly  surpassed  by  apparatus 
which  is  still  giving  reliable  and  satisfactory  service.  For 
example,  the  life  of  the  ordinary  steam  engine  may  be  taken  at 
20  5'ears,  but  it  is  not  uncommon  to  find  engines  still  in  use 
that  are  very  much  older  than  this.  The  writer  noted,  within 
a  few  months,  that  a  vertical  engine  installed  in  England  in 
1856  had  recently  been  equipped  with  condenser,  supplied  with 
superheated  steam,  and  was  still  in  use  at  55  years  of  age, 
giving  economical  and  satisfactory  results.  Cases  of  this  kind 
will  illustrate  the  necessity  for  personal  inspection  in  determining 
depreciation  and  the  need  of  experience  and  common  sense  in  the 
application  of  any  rules  of  depreciation.  For  apparatus  still 
giving  satisfactory  service  after  the  expiration  of  it's  assumed  life, 
it  is  only  fair  in  estimating  theoretical  depreciation  to  allow  a 
value  greater  tnan  scrap  value;  the  minimum  value  of  all  types 
of  engines,  boilers,  pumps,  heaters,  condensers,  line  transformers 
and  shafting  is  at  present  being  taken  by  the  Wisconsin  Com- 
mission, for  example,  at  25  per  cent.;  generators,  motors,  rotaries, 
arc  lamps,  wood  and  iron  poles,  20  per  cent.;  station  transformers, 
40  per  cent.;  storage  batteries,  35  per  cent.,  and  switchboard 
instruments  and  electric  meters,  which  must  be  kept  in  a  high 
state  of  repair,  80  per  cent,  as  the  minimum  percentage  of  re- 
duction cost  for  apparatus  still  in  use  though  theoretically 
''dead." 

It  is  the  practice  of  the  Wisconsin  Commission,  in  addition  to 
estimating  depreciation  in  relation  to  expired  life,  to  further 
modify  their  results  with  respect  to  the  condition  of  the  appara- 
tus appraised,  that  is  whether  it  is  found  to  be  in  good,  fair  or 
poor  condition.  If  in  good  condition,  100  per  cent,  of  the  value 
allowed  on  the  basis  of  expired  life  is  taken;  if  in  fair  condition, 
90  per  cent,  of  the  unexpired  life  is  allowed;  but  if  in  poor  con- 
dition, only  80  per  cent,  of  the  unexpired  life  as  figured  is  allowed. 
The  decision  as  to  the  condition  of  the  apparatus  good,  fair  or  poor 

12 


178  VALUATION  OF  PUBLIC  UTILITIES 

is  determined  by  an  inspector  whose  experience,  judgment  and 
common  sense  form  the  basis  of  his  conclusion. 

As  3,  4  and  5  per  cent,  are  rather  common  rates  of  return  on 
funds  allowed  to  accrue  with  interest,  the  curves  on  the  accom- 
panying plate,  Fig.  6 ,  are  given,  being  reproduced  from  the 
author's  paper  appearing  in  the  June,  1911,  Proceedings  of  the 
American  Institute  of  Electrical  Engineers.  The  curves  indicate 
the  values  in  percentages  that  obtain  at  any  given  time  for  ap- 
paratus having  lives  varying  from  5  to  100  years.  The  abscissa 
graduated  from  0  to  100  indicates  the  age,  the  ordinates  0  to  100 
indicate  either  the  percentage  of  depreciation  to  be  subtracted 
from  the  cost  to  obtain  theoretical  present  value  or  the  percent- 
age of  the  original  value  direct.  To  use  the  curves,  start  from 
a  point  on  the  abscissa  indicating  the  life  already  expired,  follow 
the  vertical  until  it  intersects  with  the  curve  marked  with  the 
assumed  life  of  the  property  being  considered,  then  follow  the 
horizontal  to  the  left  and  read  from  the  ordinate  the  percentage 
of  depreciation  or  the  remaining  present  value  as  may  be  de- 
sired. Uniform  or  "straight  line"  depreciation,  for  the  lives 
indicated  by  the  diagran^  may  be  obtained  by  drawing  a  straight 
line  from  the  two  points  connected  by  any  of  the  curves  and 
reading  from  it  instead  of  from  the  curve. 

The  fund  that  will  accumulate  at  the  end  of  any  number  of 
years  through  the  annual  laying  aside  of  a  uniform  amount  and 
putting  that  out  at  compounded  interest,  is  determined  by  the 
following  formula.      (See  Table  IX.) 

The  sum  to  be  laid  aside  annually  at  compound  interest  to 
accumulate  a  given  amount  at  the  end  of  a  number  of  j^ears  is 
determined  from  the  following  formula.     (See  Table  X.) 

(1  -^Rr—i 

where  F  =  the  accumulated  amount  in  dollars  at  the  end  of  iV 

years. 
D  =  the  annual  amount  of  dollars  laid  aside  at  interest 

compounded  every  twelve  months. 
R  =  Xh.e  annual  rate  of  interest  expressed  as  hundredths 

of  a  dollar. 
A7  =  the  number  of  vears  the  amount  is  annuallv  laid  aside. 


0     100 


10      90 


1 1  H  I  M  1 1  M  !  1 1 !  1 1  ffffffffl 


CURVES  SHOWING  THEORETICAL  DEPREClATIOM 
BASED  ON  ANNUALDEPOSITS  COMPOUNDED 
YEARLY  AT  3,  4  &  51  DURING  LIFE. 


DEPRECIATION  179 

During  the  past  few  years,  a  large  and  varied  assortment  of 
figures  have  been  offered  by  more  or  less  competent  authorities 
as  to  the  proper  rates  of  depreciation  to  be  applied  to  different 
classes  of  physical  property  in  accumulating  depreciation  funds 
or  in  the  determination  of  present  values.  These  figures,  while 
interesting  and  carrying  the  weight  of  individual  authority  have, 
in  no  sense,  been  judicially  approved,  the  writer  therefore  has 
undertaken  to  set  out  in  a  table,  shown  in  the  following  pages, 
Table  XI,  figures  that  have  been  used  by  commissions  or  others 
in  rendering  decisions  which  have  in  effect,  largely  become  law. 

The  figures  for  ''straight  line"  depreciation,  given  as  those  of 
the  Wisconsin  Commission,  are  derived  by  the  Author  from 
tables  giving  the  lives  of  various  property  as  used  at  present, 
by  the  Wisconsin  Commission,  but  subject  to  change  at  any 
time. 

While  these  tables  show  accepted  rates  of  depreciation,  which 
include  as  a  rule  some  allowance  for  obsolescence  and  inadequacy, 
they  should  always  be  considered  as  tentative  and  subject  to 
modification  for  any  particular  case,  they  cannot  be  applied  in- 
discriminately and  they  must  be  used  with  conservatism  and  good 
judgment.  They  are  given  as  indications  of  what  has  been  done 
and  the  line  of  procedure  heretofore  followed.  It  would  seem  that 
we  can  only  advance  by  a  thorough  understanding  and  knowledge 
of  what  other  people  are  doing  in  treatment  of  the  subject  of 
depreciation,  and  these  tables  are  given  because  they  show  figures 
which  have  been  approved  in  important  cases  and  as  indicating 
what  fairly  may  be  expected  by  those  who  are  interested  in 
utility  companies  when  they  have  to  appear  before  Courts  or 
Commissions.  The  re-adjustment  of  rates  based  on  the  use  of 
such  figures  and  their  acceptance  both  by  the  Public  Service 
Commissions  and  public  utility  companies,  certainly  establishes 
them  much  more  firmly  than  mere  engineering  opinions  and 
gives  them  in  effect  the  semblance  of  law\ 

The  figures  given  refer  to  "straight  line  theoretical  deprecia- 
tion" and  have  been  applied  to  electrical  properties,  the  life  of 
the  apparatus  of  which  is  noticeably  short  compared  with  many 
other  classes  of  property,  such  as  water  works,  gas  plants,  etc. 

As  will  be  recognized  the  figures  given  have  been  used  foi- 
rate-making,  sale  and  capitalization  cases. 


180 


VALUATION  OF  PUBLIC  UTILITIES 


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DEPRECIATION 


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188 


VALUATION  OF  PUBLIC  UTILITIES 


TABLE  XI 

APPROVED  RATES  USED  IN   ESTIMATING  THEORETICAL    DEPRECIATION 
(Maintenance  not  included) 


Property 

Depreciation 

per  cent,  per 

year 

Authority 

Remarks 

Straight  line 

Aerial  Lines 

Air  Brakes 

Air  Compressors 

Arc  Lamps 

5 
5 

4-5 

61 
15 

8 

5 

3i-4 
10 

5 

61 
5 
10 

61 

5 
50 

wearing  value 

5 

3i-10 

li 
2 

2-4 
2 

2 

5 

50     mainte- 
nance cost 

6i 

St.  Louis  P.  S.  C 

Wisconsin  P.  S.  C 

Traction  Val.  Comm. . . . 
Wisconsin  P.  S.  C 

Union  Elec.  L.  &  P.  Co. 
Chicago  Con.  Tract.  Co. 

Belting 

St.  Louis  P.  S.  C 

Wisconsin  P.  S.  C 

Traction  Val.  Comm 

B.  J.  Arnold 

versy,  Atlanta,  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co. 

Boilers 

Chicago  Con.  Tract.  Co. 
Coney  Island  &  Brooklyn 
adopted  by  P.  S.  C,  N.  Y. 

(Water  Tube) 

(Fire  tube) 

(Water  tube) 

(Fire  tube) 

Bonds 

Wise.  P.  S.  C. 

Wise.  P.  S.  C 

P.  S.  C,  N.  Y. 

Street     Lighting     Contro- 
versy, Atlanta,  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co. 

Chicago  Con.  Tract.  Co. 

St.  Louis  P  S.  C 

Traction  Val.  Comm. .  . . 

Breeching  and  Con- 

Wise.  P.  S.  C 

Traction  Val.  Comm 

Traction  Val.  Comm.. . . 
E.  G.  Connette 

P.  S.  C,  N.  Y. 
Chicago  Con.  Tract.  Co. 

Buildings 

(Brick) 

(Wood) 

Cables 

Underground 
(high  tension)  . . 

Underground  (low 
tension) 

(Aerial    lead 
covered) 

Wise.  P.  S.  C. 

3rd  Ave.  case,  adopted  by 
P.  S.  C,  N.  Y. 

St.  Louis  P.  S.  C 

versy,  Atlanta.  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co. 

P.  S.  C,  N.  Y. 

Wisconsin  P.  S.  C. 

P.  S.  C,  N.  Y. 

DEPRECIATION 


189 


APPROVED  RATES  USED  IN  ESTIMATING  THEORETICAL  DEPRECIATION. 

Continued 
(Maintenance  not  included) 


Property 

Depreciation 

per  cent,  per 

year 

Authority 

Remarks 

Straight  line 

(Underground 
lead  covered)  . .  . 

(Underground 
lead  covered) .  .  . 

Coal  and  Ash  Han- 
dling Machinery. .  . 

4 
5 

7 
5 

10 

4 

5 

5 

5 
10 

6i 

1 

2 

2 

8J-12i 

3-5 

5-7^ 

5 

6  J 

5 

6§ 
5 

6§ 

Dependent  on 
observed  wear 
6i 

Wisconsin  P.  S.  C. 

St.  Louis  P.  S.  C 

Traction  Val.  Comm. . .  . 

Union  Elec.  L.  «fe  P.  Co 

Chicago  Con.  Trac.  Co. 
3rd  Ave.  case,  adopted  by 
P.  S.  C,  N.  Y. 

Wisconsin  P.  S.  C. 
Traction  Val.  Comm. . .  . 
B.  J.  Arnold 

Coney  Island  &  Brooklyn 

adopted    by    P.     S.     C, 
N.  Y. 
3rd  Ave.  case,  adopted  by 
P.  S.  C,  N.  Y. 

Street     Lighting     Contro- 

Wisconsin P.  S.  C. 

St.  Louis  P.  S.  C 

versy,  Atlanta,  Ga.,  1899 
Union  Elec.  L.  &  P.  Co. 

Cross  Arms 

Engines  (Steam) 

(Steam) 

Wisconsin  P   S.  C 

St.  Louis  P.  S.  C 

Wisconsin  P.  S.  C. 

Traction  Val.  Comm. . .  . 
B.  J.  Arnold 

P.  S.  C,  N.  Y. 
Union  Elec.  L.  &  P.  Co. 

Chicago  Con.  Trac.  Co. 

(Steam) 

adopted    by    P.     S.     C, 
N.  Y. 
3rd  Ave.   case,  adopted  by 

(Gas) 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 

P.  S.  C.  N.  Y. 

(Steam,  slow 
speed) 

(Steam,  high 
speed) 

Street     Lighting     Contro- 

Feeders  

St.  Louis  P.  S.  C 

Traction  Val.  Comm. . .  . 
Wisconsin  P.  S.  C. 

versy,  Atlanta,  G a.,  1899. 
Union  Elec.  L.  &  P.  Co. 

Chicago  Con.  Trac.  Co. 

(W  P.  Insulation) 

190 


VALUATION  OF  PUBLIC  UTILITIES 


APPROVED  RATES  USED  IN  ESTIMATING  THEORETICAL   DEPRECIATION.- 

Continued 
(Maintenance  not  included) 


Property 


Depreciation 

per  cent,  per 

year 


Straight  line 


Authority 


Remarks 


Foundations — 
Machinery. 


Fuel   Oil   Handling 
Machinery 


Generators . 


(Modern  type) .  .  . 
(Obsolete  type)... 
(Steam  turbo)  . .  . 


Heaters 

(Feed    water, 

closed)   

(Feed    water, 

open) 

Meters 

(Electric   switch- 
board)   

(Electric  service) 
(Electric) 

Motors  (Railway)... 
(Railway) 

(Railway) 

(Railway) 

Paving 


Same  as  life  of 
apparatus 
supported 

Same  as  life  of 
apparatus 
supported 


3-8 
5 


5 

6i 

5 
10 


4-6 

3* 

3J 


5 

6i 


Trac.  Val.  Comm.. 
Henry  Floy 

Trac.  Val.  Comm. 

Trac.  Val.  Comm. 
B.  J.  Arnold 

Henry  Floy 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
Arbitrators 

St.  Louis  P.  S.  C. 

Trac.  Val.  Comm. 

Wisconsin  P.  S.  C 

Wisconsin  P.  S.  C 


3* 
By  inspection. 


5 
10 


50   wearing 
value 
50 


Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
St.  Louis  P.  S.  C. 


Trac.  Val.  Comm. 
B.  J.  Arnold 


Henry  Floy . 


B.  J.  Arnold. 
Henry  Floy. . 


Chicago  Con.  Trac.  Co. 


3rd  Ave.  case,  adopted  by 
P.  S.  C,  N.  Y. 


Chicago  Con.  Trac.  Co. 

Chicago  Con.  Trac.  Co. 
Coney  Island  &  Brooklyn, 

adopted    by    P.     S.      C, 

N.  Y. 
3rd  Ave.  case,    adopted   by 

P.  S.  C,  N.  Y. 


Street     Lighting     Contro- 
versy, Atlanta,  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co 

Chicago  Con.  Trac.  Co. 


.  .    Union  Elec.  L.  &  P.  Co. 


Wisconsin  P.  S.  C 

Arbitrators 


Chicago  Con.  Tract.  Co. 
Coney  Island  &  Brooklyn 

adoptedbyP.  S.  C.,N-  Y. 
3rd  Ave.  case,  adopted  by 

P.  S.  C,  N.  Y. 

Street  Lighting  Contro- 
versy, Atlanta,  Ga.,  1899. 

Coney  Island  &  Brooklyn 
adopted  by  P.  S.CN.Y. 

3rd  Ave.  case,  adopted  by 
P.  S.  C,  N.  Y. 


DEPRECIATION 


191 


APPROVED    RATES  USED  IN  ESTIMATING  THEORETICAL  DEPRECIATION.- 

Continued 
(Maintenance  not  included) 


Property 

Depreciation 

per  cent,  per 

year 

Authority 

Remarks 

Straight  line 

Piping  and  Covering 

4-4i 
6 

5 

5 
5 

6§ 

2 

5 

54-8i 
2i 
10 

5 
5 

5 

6i 
5 

6§ 

4 

4 

5 

3i 

5 

5 

5 

6i 
3 
10 

Traction  Val.  Cowm 

B.  J.  Arnold 

Chicago  Con.  Trac.  Co. 

adopted  by  P.  S.C,  N.  Y. 

Wisconsin  P.  S.  C. 

P.  S.  C,  N.  Y. 

Poles  (Steel) 

St.  Louis  P.  S.  C 

versy,  Atlanta,  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co. 

3rd  Ave.  case,  adopted  by 

(Wood    in     con- 
crete)   

(Wood  in  earth).. 
(Iron) 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 

P.  S.  C,  N.  Y. 

Traction  Val.  Comm. . .  . 
B.  J.  Arnold 

lanta,  Ga.,  1899. 
Chicago  Con.  Trac.  Co. 

adopted  by  P.  S.C,  N.Y. 
3rd  Ave.  case,  adopted  by 

(Small  steam)..  .  . 

Wisconsin  P.  S.  C. 
Arbitrators 

P.  S.  C,  N.  Y. 
Street  Lighting  Con.,  At- 

Rolling Stock 

(Open  car  bodies). 
(Open     trailer 

St.  Louis  P.  S.  C 

Trac.  Val.  Comm 

Trac.  Val.  Comm 

Trac.  Val.  Comm 

Trac.  Val.  Comm 

B.  J.  Arnold 

lanta,  Ga.,  1899. 
Union  Elec.  L.  &  P.  Co. 

Chic.  Con.  Tract.  Co. 
Chic   Con.  Tract.  Co. 

(Closed     car 

Chic.  Con.  Tract.  Co. 

(Trucks) 

(Closed  and  open 

Chic.  Con.  Tract.  Co. 

(Trucks) 

B.  J.  Arnold 

adopted  byP.  S.C,  N.Y. 

adopted  by  P.  S.C,  N.Y. 

(Car  bodies  and 

equipment) 

Stack  

Wisconsin  P.  S.  C. 

Traction  Val.  Comm 

B.  J.  Arnold 

P.  S.  C,  N.  Y. 

Chicago  Con.  Tract.  Co. 
Coney  Island  &  Brooklyn 
adopted  by  P.  S.C,  N.Y. 

(Steel) 

192 


VALUATION  OF  PUBLIC  UTILITIES 


APPROVED  RATES  USED  IN  ESTIMATING  THEORETICAL  DEPRECIATION. 

Continued 
(Maintenance  not  included) 


Property 

Depreciation 

per  cent,  per 

year 

Authority 

Remarks 

Straight  line 

Stokers. 

(Fixed  parts) 

(Moving  parts)..  . 

Storage  Batteries. .  .  . 

Switchboard  and 
Wiring 

5 
20 

5 

5 

3 
6 

5 

5 
8 

10 

5 

5 

Dependent  on 

observed  wear 

Dependent  on 

observed  wear 

50  wearing 

value. 

50  wearing 
value. 
8i 
5J 

5 

6i 

6J 

5 

31 
6S 

Traction  Val.  Comm. . .  . 
Traction  Val.  Comm. . .  . 

Chicago  Con.  Tract.  Co. 
Chicago  Con.  Tract.  Co. 

3rd  Ave.  case,  adopted  by 

Wisconsin  P.  S.  C 

St.  Louis  P.  S.  C 

Traction  Val.  Comm.. .  . 
B   J   Arnold       

P.  S.  C,  N.  Y. 
Union  Elec.  L.  &  P.  Co. 

Chicago  Con.  Tract.  Co. 

Coney  Island  &  Brooklyn 

adopted  by  P.  S.CN.Y. 
3rd  Ave.  case,  adopted  by 

(Modern  type) . . . 
(Obsolete  type)... 

Telephones 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
St.  Louis  P.  S.  C 

Wisconsin  P.  S.  C. 

Tract.  Val.  Comm 

Tract.  Val.  Comm 

Tract.  Val.  Comm 

Tract.  Val.  Comm 

B   J.  Arnold 

P.  S.  C,  N.  Y. 
Union  Elec.  L.  &  P.  Co. 

Track  (Rail  Joints) . 
(Ties) 

Chicago  Con.  Tract.  Co. 
Chicago  Con.  Tract.  Co. 

(Rails) 

(Special  work) .  .  . 
(Straight    and 
special  work) .  .  . 

(Straight        and 
special  work) . . . 

(Special  work) .  .  . 
(Straight  track)  . . 

Transformers 

(Station  Service) . 

Turbines 

(Steam) 

Chicago  Con.  Tract.  Co. 

Chicago  Con.  Tract.  Co. 
Coney   Island  &  Brooklyn 

adopted  by  P.  S.C.N.  Y. 
3rd  Ave.  case,  adopted  by 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C. 
St.  Louis  P.  S.  C 

Wisconsin  P.  S.  C. 
Wisconsin  P.  S.  C 
St.  Louis  P.  S.  C 

P.  S.  C,  N.  Y. 
Union  Elec.  L.  &  P.  Co. 

(Water) 

(Steam) 

Union  Elec.  L.  &  P.  Co. 

DEPRECIATION 


193 


APPROVED  RATES  USED  IN  ESTIMATING  THEORETICAL  DEPRECIATION.— 

Concluded. 
(Maintenance  not  included) 


Property 


Depreciation 

per  cent,  per 

year 


Straight  line 


Authority 


Remarks 


Wire 

Trolley  Allowance  of  80.5  lbs.  per  1000  ft.  for  wearing  value. 

of  No   1/0  wire  Tract.  Val.  Comm. 

Trolley  AUowance  of  106.8  for  No.  2/0    Tract.  Val.  Comm. 
From    observa- 
tion B.  J.  Arnold 


W.  P. 


50 


maintenance  cost 

Henry  Floy 


Trolley  1/0  under  1  minute  headway  50  Wisconsin  P.  S.  C. 
Trolley  2^0  under  1  minute  headway  40  Wisconsin  P.  S.  C. 
Trolley  3/0  under  1  minute  headway  33^  Wisconsin  P.  S.  C. 
W.  P.  6i  Wisconsin  P.  S.  C. 

W.  P  7i  Arbitrators 


Chicago  Con.  Tract.  Co. 
Chicago  Con.  Tract.  Co. 

Coney  Island  &  Brooklyn, 
adopted  by  P.  S.  C,  N.  Y. 

3rd  Ave.  case,  adopted  by 
P.  S.  C.  N.  Y. 


Street  Lighting  Con.,  At- 
lanta, Ga.,  1899. 


Depreciation  Accounts  or  Reserve  Funds. — A  recognition  of 
the  various  classes  of  depreciation  continuously  at  work  on 
physical  property  with  the  means  taken  to  compensate  for 
deterioration  or  the  conservation  of  the  original  investment, 
whether  through  expenditures  made  as  a  part  of  regular  operating 
expense  or  from  accumulated  funds  or  even  through  assessments 
on  investors — provided  capitalization  is  not  thereby  increased — 
has  no  necessary  connection  with  the  bookkeeping  classification 
of  the  expenses  or  the  amounts  that  may  or  may  not  have 
accumulated  in  reserve  funds.  While  wear  and  tear  have  com- 
monly been  borne  as  a  part  of  operating  expense,  it  is  equally 
important  that  the  other  classes  of  depreciation,  or  annual 
provision  for  accruing  deterioration,  be  made  a  part  of  the  cost 
of  operation  if  the  investment  is  to  remain  intact.  In  all  cases 
involving  a  consideration  of  the  expenses  of  keeping  a  property 
in  operation,  there  should  invariably  be  included  allowances  to 
cover  all  ultimate  depreciation  and  replacement.  For  a  small 
company  or  where  relatively  large  proportions  of  the  invested 
capital  are  locked  up  in  few  or  single  pieces  of  property,  it  is 
preferable  to  accumulate,  in  advance  out  of  operating  income, 
reserve  funds  from  which  to  provide  for  all  classes  of  deprecia- 

13 


194  VALUATION  OF  PUBLIC  UTILITIES 

tion.  But  such  method  may  be  unnecessary  and  possibly  an 
inexpedient  accounting  complexity  with  large  corporations, 
where  the  investments  in  any  single  piece  of  physical  property 
are  small  relative  to  the  total  investment.  The  truth  of  the  above 
will  be  at  once  recognized  from  the  following  illustration.  If  the 
company  which  erected  the  Metropolitan  Life  Insurance  building 
had  only  that  property,  it  would  be  essential  that  funds  should 
be  laid  aside  annually  in  amounts  sufficient  to  replace  the  original 
investment  at  the  end  of  the  useful  life  of  said  building.  On  the 
other  hand,  if  all  the  surface  railways,  subways  and  elevated 
railways,  electric  light  and  gas  companies  doing  business  in 
greater  New  York  were  a  single  corporation,  it  probably  would 
be  an  entirely  unnecessary  and  useless  accounting  expense  to 
maintain  depreciation  accounts  and  funds  for  the  various  pieces 
of  physical  property.  It  will  be  seen  that  the  replacement  of  a 
considerable  percentage  of  the  trackage  or  a  large  amount  of  the 
rolling  stock  or  even  a  complete  power  house,  in  the  natural 
course  of  operation,  would  not  make  such  draft  upon  the  gross 
income  or  effect  the  annual  operating  expenses  to  such  an  extent 
as  to  jeopardize  the  net  earnings  or  unwarrantably  increase  the 
amounts  regularly  expended  on  account  of  depreciation.  In 
brief,  where  the  properties  are  large  enough,  depreciation  be- 
comes only  normal  wear  and  tear.  In  every  case,  however, 
operating  expenses  should  be  made  to  provide  for  ultimate  loss 
in  value,  whether  reserve  funds  are  accumulated  or  all  depreci- 
ation is  charged  to  the  "wear  and  tear  account."  It  is  on  this 
theory  that  the  Receiver  of  the  Third  Avenue  Railway  in  New 
York  City,  operating  a  large  property  having  numerous  physical 
elements  so  that  all  deterioration  became  simply  "  wear  and  tear" 
and  a  part  of  operating  expenses,  declined  to  obey  the  order 
of  the  Public  Service  Commission  and  provided  no  depreciation 
fund  whatever,  simply  removing  deterioration  when  it  occurred 
and  charging  it  as  maintenance  in  operating  expenses.  Since  its 
reorganization  the  Third  Avenue  Company  has  been  ordered  by 
the  Commission  to  set  up  a  depreciation  fund  consisting  of  20 
per  cent,  of  the  annual  gross  income,  but  again  the  former 
Receiver  now  the  President,  has  refused  to  comply  with  such  an 
order. 

It  has  been  the  too  frequent  practice  in  the  past  to  regard 
wear  and  tear  as  the  only  elements  of  depreciation  chargeable  to 
the  operating  expense  and  to  charge  capital  account  in  whole  or 


DEPRECIATION 


195 


in  part  with  expenditures  for  age,  inadequacy  and  obsolescence. 
The  error  of  this  procedure  is  now  almost  universally  recognized 
and  the  injustice  of  such  improper  handling  of  depreciation  to 
both  the  investor  and  the  public  being  served  is  clearly  illustrated 
in  the  following  example.  Assume  that  the  depreciable  property 
of  a  "going  concern"  represents  an  investment  of  Si, 000, 000 
upon  w^hich  the  average  depreciation  is  10  per  cent,  or  SlOO,000 
a  year,  and  the  interest  charges  at  6  per  cent,  amount  to  $60,000 
a  year.  Consider  two  plans  of  operation  first,  that  in  which 
depreciation,  except  wear  and  tear,  is  not  provided  for  as  a  part  of 
operating  expenses  and  that  said  depreciation,  i.e.,  renewals  and 
replacements,  is  taken  care  of  by  the  sale  of  additional  securities. 
The  second  plan  contemplates  that  all  depreciation  including 
wear  and  tear  is  included  as  a  part  of  operating  expenses. 
Results  of  the  operation  of  these  two  plans  will  be  as  follows: 


TABLE  XII 


1st  plan  capital 
invested 

2d  plan  capital 
invested 

1st  plan  paid  by 

consumer  each 

year 

2d  plan  paid  by 

consumer  each 

year 

1st  year. .  .  . 

$1,000,000 

SI, 000, 000 

S60,000 

$160,000 

2d  year .... 

1,100,000 

1,000,000 

66,000 

160,000 

3d  year .... 

1,200,000 

1 ,000,000 

72,000 

160,000 

4th  year 

1,300,000 

1,000,000 

78,000 

160,000 

5th  year 

1,400,000 

1,000,000 

84,000 

•160,000 

6th  year 

1,500,000 

1 ,000,000 

90,000 

160,000 

7th  year 

1,600,000 

1,000,000 

96,000 

160,000 

8th  year. . . . 

1,700,000 

1 ,000,000 

102,000 

160,000 

9th  year 

1,800,000 

1,000,000 

108,000 

160,000 

10th  year 

1,900,000 

1,000,000 

114,000 

160,000 

11th  year 

2,000,000 

1,000,000 

120,000 

160,000 

12th  year 

2,100,000 

1,000,000 

126,000 

160,000 

13th  year 

2,200,000 

1,000,000 

132,000 

160,000 

14th  year 

2,300,000 

1,000,000 

138,000 

160,000 

15th  year 

2,400,000 

1,000,000 

144,000 

160,000 

16th  year 

2,500,000 

1,000,000 

150,000 

160,000 

17th  year.. .  . 

2,600,000 

1,000,000 

156,000 

160,000 

18th  year 

2,700,000 

1,000,000 

162,000 

160,000 

19th  year 

2,800,000 

1,000,000 

168,000 

160,000 

20th  year 

2,900,000 

1,000,000 

174,000 

160,000 

+  *  * 

*   *   * 

*   *   * 

*   *   * 

*  *  * 

50th  year 

5,900,000 

Total  pa 

1,000,000 
id  by  Consumers .  . 

354,000 

160,000 

$10,350,000 

$8,000,000 

From  the  above,  it  will  be  seen  that,  as  regards  the  investor, 
under  the  second  plan,  he  has  his  security  unimpaired  at  the 


196  VALUATION  OF  PUBLIC  UTILITIES 

end  of  the  life  of  the  apparatus;  and  under  the  first  plan,  the 
capitalization  is  constantly  increasing  and  before  many  years,  it 
equals  an  amount  several  times  that  of  the  actual  security. 
As  regards  the  consumer,  under  the  second  plan  he  apparently 
saves  over  $2,000,000  or  25  per  cent,  of  the  cost  for  exactly  the 
same  service  rendered  him  under  the  first  plan.  It  may  be 
argued  that  the  consumer  may  deposit  S  100,000  to  his  credit  in 
the  bank  the  first  year,  $94,000  the  second  year,  and  so  on,  thus 
having  a  sum  at  interest  which  will  help  carry  the  increased 
charges  of  later  years.  Even  so  his  money  must  be  tied  up 
eternally  and  is  therefore  useless  to  him. 

Application  of  Depreciation. — In  considering  the  subject  of 
depreciation,  it  should  be  clearly  understood  and  appreciated  that 
the  term  is  used  with  two  entirely  distinct  and  separate  mean- 
ings as  follows: 

1.  Rate  of  Depreciation. — In  the  determination  of  an  annual 
rate  of  deterioration,  which  is  continuously  reducing  the  worth  of 
the  property  and  may  be  desired  merely  for  the  purpose  of 
estimating  the  proper  amount  to  lay  aside  yearly  in  reserve 
funds.  In  this  use  of  "depreciation,"  there  is  not  usually 
included  the  amount  of  deterioration  taken  care  of  as  a  part  of 
the  regular  operating  expenses;  that  is,  wear  and  tear,  the  term 
generally  refers  only  to  the  deterioration  due  to  age  or  inadequacy 
or  obsolescence — any  one  of  these  terms  but  not  the  sum  of  them. 

2.  Total  of  Depreciation. — In  determxining  the  total  estimated 
deterioration  of  property  at  a  given  period,  which  amount  is  ob- 
tained for  the  purpose  of  deducting  it  from  the  cost — new  or  re- 
production— to  obtain  present  value.  In  this  use  of  the  term, 
which  is  really  the  condition  of  being  deteriorated,  there  may  be 
included  a  consideration  of  all  classes  of  depreciation;  wear  and 
tear,  age,  inadequacy,  obsolescence,  and  deferred  maintenance. 

There  has  been  such  marked  development  and  improvement  in 
all  mechanical  appliances,  particularly  along  the  electrical  lines, 
that  inadequacy  and  obsolescence  have  usually  come  into 
effect  before  age,  and  in  consequence,  knowledge  of  the  deprecia- 
tion of  all  electrical  properties  due  to  age  has  not  yet  been  fully 
established.  This  results  from  the  fact  that  the  amount  of  data 
relating  to  electrical  properties  which  is  available,  showing  by 
specific  reference  the  date  both  of  installation  and  abandonment 
through  ''age"  is  remarkably  small.  It  should  be  widely  col- 
lected and  correlated. 


DEPRECIATION  197 

The  determination  of  depreciation  due  to  inadequacy  and 
obsolescence  is  a  particular!}^  delicate  matter,  it  depends  so 
largely  on  local  conditions  and  especially  upon  individual  judg- 
ment and  equipoise.  Inadequacy  and  obsolescence  usually 
develop  so  quickly  that  very  frequently  the  property  in  question 
becomes  inadequate  or  obsolete  within  a  few  weeks  or  months, 
and  has  depreciated  to  scrap  value  almost  as  soon  as  these 
classes  of  depreciation  are  recognized;  a  space  of  time  entirely 
too  brief  in  which  to  apply  ordinary  methods  of  offsetting  de- 
preciation. Thus  it  will  be  recognized  that  an  attempt  to 
prognosticate  on  inadequacy  and  obsolescence  over  considerable 
periods  in  advance  of  their  appearance  is  little  more  than  a  guess, 
even  by  the  most  experienced. 

There  is  urgent  necessity  for  cooperation  l^y  manufacturers, 
consulting  engineers  and  operators  of  public  utility  properties  for 
the  purpose  of  collecting  data  available  as  to  the  depreciation 
of  physical  property  of  all  classes  used  by  public  utilities.  The 
information  should  be  so  collected  as  to  make  clear  the  causes  of 
depreciation  and  the  rate  at  which  it  has  progressed.  For 
example,  wear  and  tear  would  probably  have  to  become  sub- 
divided into  maintenance  and  accident,  otherwise  a  serious  acci- 
dent would  make  abnormal  increase  in  the  wear  and  tear  de- 
terioration. Obsolescence  might  be  divided  so  as  to  show  whether 
the  obsolescence  was  caused  by  city  ordinance  or  the  invention 
of  new  apparatus.  In  obtaining  age  depreciation,  care  must  be 
exercised  that  the  apparatus  is  abandoned  through  exhaustion 
of  life,  not  through  inadequacy  or  obsolescence. 

In  determining  the  total  amount  of  deterioration  due  to  in- 
adequacy and  obsolescence,  only  those  elements  of  the  property 
which  have  clearly  and  unequivocally  so  depreciated  should  be 
written  off  to  this  account,  because  as  previously  stated,  opinions 
of  engineers  on  this  subject  may  differ  honestly  but  widely. 
On  the  other  hand,  in  determining  the  rate  of  depreciation  for 
making  provision  covering  inadequacy  and  obsolescence,  the 
leaning  should  be  to  the  other  side;  that  is,  the  engineer  should 
be  sure  to  provide  a  rate  high  enough  to  take  care  of  these  classes 
of  depreciation  out  of  the  operating  income;  for  the  reason  that 
in  this  case,  the  expert  is  endeavoring  to  forestall  the  future  and 
he  must  be  conservative  in  protecting  the  property;  otherwise, 
a  sudden  development  of  inadequacy  or  obsolescence  will  result 
in  an  abnormal  depreciation  expense  without  funds  to  take  care 


198  VALUATION  OF  PUBLIC  UTILITIES 

of  same.  No  unfairness  will  result  from  a  liberal  annual  allow- 
ance to  provide  for  depreciation  as  any  too  rapid  accumulation  of 
funds  would  result  merely  in  a  revision  of  the  rate. 

As  the  United  States  Bureau  of  Internal  Revenue  provides  that 
reduction  in  value  authorized  for  depreciation  "shall  include 
all  expense  items  under  the  various  heads  acknowledged  as 
liabilities,"  it  will  be  seen  that  the  proper  understanding  of  the 
question  of  depreciation  is  a  vital  one  for  those  connected  with 
corporation  management  because  if  no  depreciation  fund  is  set 
up,  nothing  can  be  included  in  the  cost  of  operation  as  necessary 
to  provide  for  depreciation,  as  would  be  essential  in  a  case  in- 
volving rate  regulation  for  example.  Moreover,  the  State  Pub- 
lic Service  Commissions  are  now  generally  requiring  the  setting 
up  of  depreciation  accounts  and  reserves  on  a  basis  to  be  de- 
cided by  each  corporation  itself,  thus  necessitating  a  thorough 
understanding  of  the  various  phases  of  the  theory  of  depreciation. 

1.  Rate  of  Depreciation-— ''The  amount  that  should  be  charged  off 
annually  for  depreciation  is  difficult  to  determine.  The  life  of  the 
various  classes  of  property  depends  very  largely  upon  the  original 
quality  of  the  same,  the  location,  the  kind  of  usage  to  which  it  is  sub- 
jected, the  amount  expended  for  ordinary  or  current  repairs,  the  prompt- 
ness of  these  repairs,  and  upon  other  factors  of  this  character.  In 
addition  to  this,  there  is  also  the  question  of  obsolescence,  or  such 
changes  as  become  necessary  because  of  new  inventions  or  because  of 
changes  in  the  art.  In  the  electrical  field  in  particular  such  changes 
are  very  frequent.  *  *  *  It  is  usually  held  that  from  5  to  10  per  cent, 
on  the  investment  is  required  yearly  to  meet  depreciation  of  all  kinds, 
depending  upon  conditions.  When  current  repairs  are  light,  it  is 
probable  that  the  amount  to  be  set  aside  will  closely  approach  the  latter 
figure;  when  current  repairs  are  heavy  and  the  property  kept  in  good 
condition,  the  former  figure  may  be  sufficient.  A  great  deal  depends 
upon  the  conditions  under  which  the  plant  is  operating.  It  is  probable 
that  the  actual  amount  that  is  needed  by  any  particular  plant  can  be 
determined  only  through  exj^erience  and  by  a  close  study  of  all  the 
facts  involved."^ 

The  manner  of  determining  the  amount  to  be  set  aside  for 
annual  depreciation  varies,  there  being  three  general  methods 
recognized. 

a.  An  estimate  based  on  a  percentage  of  the  cost  of  the  prop- 
erty being  depreciated.     Said  percentage  is  such  that  either  on 

'  Decision  of  the  Railroad  Commission  of  Wisconsin,  June  2,  1908. 
City  of  Dodgev'ille  vs.  Dodgeville  Electric  Light  &  Power  Co. 


DEPRECIATION 


199 


a  straight  line  or  one  of  the  sinking  fund  bases  heretofore  de- 
scribed it  will  be  sufficient  to  provide  a  fund  which,  together 
with  the  scrap  value,  will  replace  the  property  in  question. 
Such  method  of  providing  depreciation  funds  has  been  adopted 
for  example  by  the  Madison  (Wise.)  Gas  and  Electric  Co.  The 
Special  Master  in  the  Columbus,  Ohio  case  held  that  the  amount 
of  operating  expenses  chargeable  to  depreciation  should  be 
"5  per  cent,  of  the  total  cost  of  the  plant  including  real  estate,  real 
estate  constituting  but  7  per  cent,  of  the  total  valuation. "^ 
The  present  laws  of  Massachusetts  provide  in  respect  to  munici- 
pally owned  gas  or  electric  plants,  that  there  shall  be  included 
an  amount  for 

"depreciation  equal  to  3  per  cent,  of  the  cost  of  the  plant  exclusive  of 
land  and  water  power  appurtenant  thereto." 

h.  A  fixed  percentage  of  the  gross  earnings.  This  is  a  very 
convenient  and  quite  widely  used  method.  It  has  the  advantage 
of  regulating  the  amount  provided  for  depreciation  in  accordance 
with  the  gross  income  but  a  fund  so  provided,  may  have  no 
proper  relation  to  the  deterioration  actually  taking  place  in  the 
property  because  it  is  fixed  entirely  independently  of  the  invested 
values.  This  method  is  sometimes  taken  to  include  wear  and 
tear  and  sometimes  not.  The  practice  in  this  regard  is  illustrated 
by  the  practice  of  the  companies  in  the  following  Table  XIII: 

TABLE  XIII 


Name  of  company 


Milwaukee  companies: 

Railway  departments 

Gas,  electric  light  and  steam  heat  departments . 

United  Railways  Company  of  St.  Louis 

Union  Electric  Light  &  Power  Co.,  St.  Louis 

Suburban  Electric  Light  &  Power  Co 

Detroit  Edison  Company  and  subsidiaries 

Omaha  &  Council  Bluffs  Street  Railway  Co 

Chicago  Street  Railways 

Philadelphia  Rapid  Transit  Co 


Per  cent,  of  gross  revenue 
expended  or  appropriated  for 


Maintenance 


Depreciation 


11.. 3 
6.15 

13.67 
4.95 
7.10 
6.45 
7.00 
6.00 


9.9 
8.12 
10.0 
16.0 
10.85 
10.23 
10.0 
8.0 


Undivided  15. 


1  Columbus  Railway  and  Light  Company  vs.  City  of  Columbus,  Report 
of  Special  Master  in  tho  Circuit  Court  of  U.  S.  Southern  District,  of  Ohio, 
Eastern  Division,  page  43. 


200  VALUATION  OF  PUBLIC  UTILITIES 

c.  On  the  basis  of  kilowatt-hours  output  or  car-miles  run.' 
For  example  the  New  York  Edison  Company  charges  off  monthly 
for  renewals  and  replacements,  etc.,  an  amount  equal  to 
1  per  cent,  per  kilowatt  hour  on  current  sold  to  general  consumers 
in  addition  to  wear  and  tear.  In  Cleveland,  5  cents  per  car 
mile  is  provided  to  cover  both  maintenance  and  other  deteriora- 
tion. In  Brooklyn,  the  subsidiaries  of  the  Brooklyn  Rapid 
Transit  System  allow  amounts  varying  from  2.7  cents  to  4.4  cents 
per  car  mile  for  equipment  of  surface  roads  and  from  1.4  cents 
to  2  cents  per  car  mile  for  equipment  of  either  elevated  or  partly 
elevated  railways;  from  2.2  cents  to  2.4  cents  per  car  mile  for  way 
and  structures  for  surface  roads;  from  1.1  cents  to  1.8  cents  for 
elevated  or  partly  elevated  railways,  to  cover  not  only  obsoles- 
cence, inadequacy,  renewals  and  replacements  but  also  repairs 
and  maintenance. 

In  estimating  depreciation  where  approximate  results  only 
are  desired,  it  is  quicker  and  more  convenient  to  disregard  scrap 
value  and  consider  only  cost  in  determining  the  principle  to 
which  the  rate  of  depreciation  or  the  amount  of  depreciation 
obtained  is  to  be  applied.  The  better  and  more  refined  method 
is  to  consider  scrap  value,  which  must  first  be  deducted  from  the 
cost,  and  the  remainder  used  as  the  principal  to  which  to  apply 
the  rate  to  obtain  the  amount  of  depreciation. 

2.  Total  Depreciation. — In  order  to  determine  at  any  given 
time  the  total  amount  of  depreciation  that  has  taken  place  in 
physical  property,  the  cost — either  original  or  reproduction — 
must  be  determined  and  from  this  subtract  the  total  estimated 
amount  of  depreciation.  In  determining  the  total  sum  of  depre- 
ciation, all  articles  or  property  included  in  the  inventory,  which 
are  not  reasonably  held  for  future  expansion  of  the  business  or 
held  at  scrap  value,  awaiting  sale,  which  have  been  "laid  aside 
and  thrown  away"  and  for  which  "new  machinery  and  new 
construction  has  been  substituted,"^  together  with  such  de- 
terioration as  results  from  wear  and  tear  and  existing  inadequacy 
or  obsolescence  and  any  deferred  maintenance,  must  be  taken  in 
order  to  obtain  the  aggregate  absolute  depreciation.  From  the 
cost  should  then  be  deducted  this  absolute  depreciation  in  order 
to  obtain  the  present,  real  or  service  value  of  the  property.     If  it 

'  People  ex  rel.  Binghamton  Light,  Heat  and  Power  Co.  vs.  Stevens 
Appellate  Division,  New  York,  Third  Dept.,  March  Term,  1911.  (Not 
reported.) 


DEPRECIATION^ 


201 


is  desired  to  go  further  than  this  and  obtain  a  theoretically  de- 
preciated value,  as  has  been  done  in  many  instances,  the  absolute 
depreciation  determined,  as  above,  must  be  increased  by  a 
theoretical  depreciation  determined  by  the  use  of  estimated 
amounts  of  deterioration  in  accordance  with  curves  3,  4  or  5 
of  Fig.  5,  or  some  other  preferred  method,  to  cover  assumed 
deterioration  for  age  and  non-existent  but  expected,  inad- 
equacy or  obsolescence. 

In  determining  the  value  of  the  physical  property  at  any 
given  time,  the  theoretical  depreciated  condition  is  obtained  by 
consideration  of  the  following  items : 

A  Cost  to  reproduce,  or  original  cost. 
B  Scrap  value. 
C  Wearing  value. 
D  Wear  and  tear. 
E  Age. 

F  Inadequacy. 
G  Obsolescence. 
H  Deferred  maintenance. 
/  Remaining  wearing  value. 
J  Present  value. 

C=  A  minut 


B 


I  =  C  minus   {D  + 


J  =  I  +  B 


E 
or 
F 
or 
G 


+  H) 


In  obtaining  the  "remaining  wearing  value"  (/),  it  will  be 
noted  that  "age"  or  "inadequacy"  or  "obsolescence"  (E 
or  F  or  G)  is  used  in  the  formula,  but  not  the  sum  of  these 
quantities.  The  reason  for  this  will  be  recognized  from  a  con- 
sideration of  the  accompanying  diagram.  Fig.  7. 

Let  0  C,  that  is  5  D  equal  scrap  value,  and  0  A,  the  cost, 
either  original  cost  or  cost  to  reproduce  new.  Assuming  the 
line  0  B,  that  is,  C  D,  represents  the  length  of  life  of  the  property 
under  consideration,  the  line  2  represents  "theoretical"  de- 
preciation due  to  age,  on  a  "straight  line"  basis  (which  may  well 
be  replaced  by  either  sinking  fund  method — curves  4  and  5 
of  Fig.  5),  and  this  element,  age,  would  ordinarily  be  the  rate 


202 


VALUATION  OF  PUBLIC  UTILITIES 


of  depreciation  used  unless  inadequacy  or  obsolescence  comes  into 
effect.  For  the  purpose  of  illustration,  assume  that  line  1 
represents  rate  of  depreciation  due  to  inadequacy  and  line  3 
depreciation  due  to  obsolescence.  At  a  glance  it  will  be  seen 
that  as  the  apparatus  in  question  would  be  abandoned  because 
of  inadequacy  some  five  years  before,  it  would  be  abandoned 
for  age,  and  as  it  would  become  decrepit  and  have  to  be  aban- 
doned on  that  account  before  obsolescence  came  into  play,  that 


\ 

\ 

\3 

>         \. 

\  1 

v\ 

1 

B 

10        15        20 
Years 

Fig.  7. 


25 


30 


inadequacy  alone  of  the  three  classes  of  depreciation  under  con- 
sideration is  to  be  taken  into  account.  At  a  given  period,  say 
10  years,  from  installation,  the  vertical  distance  from  the  point 
indicating  10  years,  will  indicate  by  intersection  with  the  proper 
curve,  the  theoretical  amount  of  obsolescence,  age  and  inade- 
quacy; but  the  sum  of  these  would  be  greater  than  the  original 
cost  showing  clearly  that  the  depreciation  which  will  first  cause 
the  abandoning  of  the  article  in  question,  should  alone  be  con- 
sidered, in  addition  to  wear  and  tear,  and  deferred  maintenance. 
The  above  sets  forth  the  general  method  of  applying  the 
theory  of  depreciation  when  the  proper  and  total  amount  of 


DEPRECIATION  203 

deterioration  is  obtained,  without  regard  to  whether  one  is  con- 
sidering the  sales  value,  service  value,  or  theoretical  deprecia- 
tion. It  is  office  work  entirely;  but  on  the  other  hand,  the 
determination  of  the  amount  of  depreciation  in  a  given  property 
is  not  office  work  and  not  principally  so.  All  authorities  agree 
that  no  exact  estimate  of  the  amount  of  depreciation  of  physical 
property  could  be  obtained  without  personal,  visual  examina- 
tion supported  by  broad  experience  and  sound  judgment;  and  it 
is  for  this  reason,  because  of  the  personal  equation,  that  experts 
differ  so  widely  as  to  results. 

The  fallacy  of  attempting  to  determine  absolute  present  value 
by  deducting  from  the  cost  to  reproduce  new  or  original  cost, 
the  value  at  a  given  age,  as  indicated  by  curves  3,  4  or  5,  in 
Fig.  8,  will  be  at  once  apparent  from  a  consideration  of  the 
following: 

Assume  that  the  "present  value"  of  a  given  piece  of  property 
is  desired,  which  has  an  estimated  life  of  20  years,  10  years 
having  already  expired.  If  at  the  several  points  there  be  taken 
on  curves  3,  4  and  5,  respectively  represented  by  the  "straight 
line"  and  "sinking  fund"  methods,  the  depreciation  of  the 
same  property  at  the  same  time,  we  have  three  decidedly  different 
values  depending  on  which  curve  is  used,  and  if  three  differ- 
ent engineers  estimating  the  present  value,  each  adopt  a  different 
curve,  they  are  prepared  to  go  on  the  stand  and  testify  to  three 
different  values  of  the  property  in  question,  which  of  course,  is  an 
absurdity  and  makes  them  ridiculous.  As  a  matter  of  fact,  the 
apparatus  in  question  can  have  only  one  value  or  another 
neither  of  which  will  depend  on  the  method  adopted  for  accum- 
ulating funds  for  which  all  these  curves  are  useful;  but  upon 
whether  the  apparatus  is  being  valued  for  what  it  would  bring 
when  sold  for  use  elsewhere,  as  shown  by  curves  1  and  2,  or  its 
worth  for  use  in  connection  with  the  purpose  for  which  it  was 
installed,  as  may  be  shown  by  curve  6,  or  its  cost  of  replacement. 

Very  many  authorities  agree  that  in  making  an  estimate  of  the 
amount  of  depreciation  effective  in  any  property,  "used  or 
useful,"  there  should  at  least  be  included  in  the  amount  to  be 
deducted,  an  estimate  of  the  amount  of  wear  and  tear,  deferred 
maintenance,  if  any,  also  scrap  value  of  property  that  has  been 
worn  out  or  superseded  as  well  as  inadequate  or  obsolete  property 
provided  it  is  still  inventoried. 


204  VALUATION  OF  PUBLIC  UTILITIES 

"Where  equipment  not  actually  part  of  the  producing  plant  has  been 
retained  and  serves  as  an  emergency  or  reserve  unit,  it  is  properly  in- 
cluded as  property  used  and  useful  in  serving  the  public.  Equipment, 
however,  which  has  been  cast  aside  for  larger  units,  more  adapted  to  the 
present  use  of  the  plant,  or  which  has  been  abandoned  as  impracticable, 
cannot  be  includecl  as  a  part  of  the  valuation  serving  as  a  basis  for 
adjustment  of  rates." ^ 

The  only  allowable  exception  to  the  inclusion  of  inadequate 
or  obsolete  property  as  a  part  of  depreciation,  is  where  inade- 
quacy or  obsolescence  has  so  suddenly  and  largely  effected  a 
property  that  its  earnings  have  not  permitted  the  writing  off, 
at  the  time  or  since,  such  developed  depreciation;  then  in  such 
cases  it  may  be  that  capitalization  or  earning  basis  should  not 
be  reduced  by  taking  account  of  any  such  depreciation.  This 
principle  has  been  established  by  the  United  States  Circuit 
Court  where  it  held  that  in  considering  the  cost  of  reproduction 
new,  -12,000,000,  the  value  of  old  street  railways  that  had  been 
replaced,  should  be  allowed  for  and  included.- 

A  similar  view  was  expressed  by  the  Supreme  Court  in  the 
opinion  written  by  Justice  Brewer  in  1894. 

■'  It  is  not  always  reasonable  to  cast  the  entire  burden  of  the  deprecia- 
tion on  those  who  have  invested  their  money  in  railroads.  Take  the 
Union  Pacific  Railway,  for  illustration.  At  the  time  the  government 
created  the  corporation,  to  induce  the  building  of  this  transcontinental 
road  through  a  largely  unoccupied  territory,  it  loaned  to  the  company 
$16,000  a  mile;  taking  as  security  therefor  a  second  hen  on  the  property 
and  granting  to  the  corporation  the  right  to  create  a  prior  lien  to  an 
equal  amount,  which  was  done.  There  is  testimony  tending  to  show 
that  the  road  in  Nebraska  could  be  built  to-day  for  $20,000  a  mile. 
Would  it  be  full  justice  to  the  government,  would  it  satisfy  the  common 
sense  of  right  and  wrong,  would  it  be  reasonable,  for  the  State  of 
Nebraska  to  so  reduce  the  rates  that  the  earnings  of  the  road  would  only 
pay  ordinary  interest  on  $20,000  a  mile,  and  so,  the  holders  of  the  first 
lien  being  paid  their  interest,  the  government  be  forced  to  be  content 
with  only  interest  on  one-fourth  of  its  investment?  Or,  to  put  the  case 
in  a  little  stronger  light,  suppose  the  promoter  of  this  enterprise  had 
been  some  private  citizen  who  had  advanced  his  $16,000  a  mile  as  the 

'  In  re-Application  of  the  Darlington  Electric  Light  and  Water  Power 
Company  for  Authority  to  Increase  Rates.  Decision  and  Order  of  Railroad 
Commission  of  Wisconsin,  June  17,  1910. 

^  U.  S.  Circuit  Court  in  the  Milwaukee  Electric  Railway  and  Light  Co. 
vs.  City  of  Milwaukee,  87  Fed.  577. 


DEPRECIATION  205 

second  lien,  and  that  the  road  could  be  constructed  to-day  for  onlj^ 
$16,000  a  mile.  Would  it  be  reasonable  and  just  to  so  reduce  rates  as 
to  simply  pay  to  the  holders  of  the  first  lien  reasonable  interest,  and 
leave  him  without  any  recompense  for  his  investment?"^ 

Whether  or  not  "theoretical  depreciation"  should  be  in- 
cluded as  part  of  the  total  depreciation  in  determining  fair 
value  of  physical  property  is  a  mooted  question.  The  Public 
Service  Commissions  have  rather  leaned  to  the  opinion  that 
such  depreciation  should  be  considered  in  determining  fair 
value.  On  the  other  hand,  many,  if  not  all,  of  the  court  de- 
cisions are  against  such  inclusion  of  theoretical  depreciation. 
This  is  indicated  by  the  decision  of  the  Supreme  Court  sustaining 
the  Master's  .opinion  in  the  famous  Consolidated  Gas  case  of 
New  York  City.  The  Master  says,  regarding  the  testimony  of 
the  expert  for  the  plaintiff,  Mr,  Marks,  and  for  the  defendant, 
Mr.  Mayer,  that 

"Mr.  Marks  did  not  particularly'  regard  the  extent  of  depreciation 
actuallj''  existing,  but  assumed  a  theoretical  deterioration  of  the  sup- 
posed life  of  the  plant.     He  testified : 

'Depreciation  results  from  several  causes.  The  most  ordinary 
one  is  decay  or  wear  and  tear,  as  observed.  There  is  another  factor 
which  is  inadequacy,  owing  to  the  increase  of  the  business.  There 
is  also  another  cause  of  depreciation,  obsolescence,  which  is  due 
to  the  changes  in  the  arts  and  in  the  methods  and  in  the  general 
growth  of  scientific  knowledge ;  if  a  works  built  at  a  certain  period  is 
kept  in  perfect  repair,  meaning  by  that,  always  restored  to  their 
original  condition,  and  in  good  working  condition,  there  remains, 
assuming  that,  a  depreciation  due  to  both  obsolescence  and  to 
inadequacy.' 

"In  this  view  he  made  estimates  on  the  theory  of  the  cost  of  final 
replacement  to  cover  such  inadequacy  or  obsolescence,  ranging  from 
25  per  cent,  to  60  per  cent,  and  based  on  a  supposed  life  of  120  years 
for  the  plant.  The  discrepancy  between  his  valuations  and  those  of 
Mr.  Mayer  is  largely  due  to  their  different  methods  of  estimating 
depreciation.     He  said: 

'Mr.  Mayer  does  not  differ  largely  from  my  own  figures  of 
structural  cost.  You  may  say  for  all  ordinary  purj^oses  they 
coincide,  with  the  exception  of  the  gas  holders  and  even  there  they 
do  not  differ  largely.     It  is  the  question  of  depreciation  entirely.' 

'  Ames  vs.  Union  Pacific  Railway  Company,  64  Fed.  165. 


206  VALUATION  OF  PUBLIC  UTILITIES 

"As  will  hereafter  appear,  it  is  proper  in  the  administration  of  a 
manufacturing  plant  to  take  depreciation  of  the  character  above 
described  into  account  and  provide  against  it  by  setting  aside  a  reserve 
fund  from  current  earnings.  For  the  purpose  of  determining  present 
value,  however,  particularly  on  the  basis  of  cost  of  reproduction,  the 
method  followed  by  Mr.  Marks  does  not  commend  itself.  It  appears 
from  the  record,  without  substantial  dispute,  that  while  certain  of  the 
plants  and  apparatus  may  not  be  in  perfect  repair,  they  are  as  a  whole 
in  efficient  operating  condition,  and  that  a  large  proportion  of  their 
capacity  is  represented  by  the  latest  pattern  of  water  gas  apparatus 
installed  within  the  last  few  years.  *  *  * 

"The  fact  thus  being  that  the  plants  are  in  good  order  and  operating 
efficiently,  it  does  not  appear  reasonable,  for  the  purposes  of  this  case, 
to  charge  them  with  a  theoretical  deficiency  so  great,  as,  if  actually 
existing,  would  make  their  successful  operation  a  practical  impossibility. 
An  estimate  of  depreciation  like  those  of  Mr.  Edgerton  and  Mr.  Mayer, 
based  on  a  detailed  examination  of  the  property  as  it  stands  to-day, 
affords  in  my  opinion  a  more  fair  and  practicable  method  to  be  followed 
in  determining  its  value."' 

From  the  above,  which  is  probably  as  full  an  exposition 
of  the  proper  basis  for  estimating  depreciation  as  ever  passed 
by  the  Supreme  Court,  several  important  points  would  seem  to  be 
made  clear: 

a.  Depreciation  should  be  determined  by  personal  inspection 
rather  than  by  theoretical  estimate. 

h.  Property  that  is  in  good  order  and  operating  efficiently, 
although  not  new,  need  not  necessarily  be  depreciated,  at  least 
in  rate  cases. 

The  decision  of  the  Supreme  Court  in  the  Consolidated  Gas 
case  has  not  been  given  due  consideration  in  the  matter  of 
depreciation  as  against  the  same  court's  decision  in  the  Knox- 
ville  Water  case,  although  both  decisions  were  rendered  the 
same  day.  In  the  writer's  opinion  there  is  no  contradiction 
between  these  decisions  as  to  the  meaning  of  "fair  value"  or 
method  of  allowing  for  depreciation  if  the  decisions  are  fairly 
interpreted. 

An  examination  of  the  Master's  Report  in  the  Knoxville 
case  show^s  that  in  obtaining  the  value  of  the  property  on  w^hich 
he  estimated  the  rate  of  return,  he  used  higher  unit  prices  than 
the  average;  he  included  over  S22,000  worth  of  service  connec- 

1  Master's  Report,  Consolidated  Gas  Co.  of  New  York.  Filed  June  24, 
1907. 


DEPRECIATION  207 

tions,  which  had  been  donated  by  the  water  consumers;  also 
$2000  as  a  ''contmgent  allowance  for  bad  bottom,"  and  he  did 
not  make  any  deduction  for  wear  and  tear,  deferred  maintenance, 
inadequacy  or  obsolescence,  adding  the  sum  of  both  complete  and 
incomplete  depreciation  to  the  estimated  value  of  the  surviving 
plant  in  order  to  obtain  the  value  which  he  used  as  the  basis 
of  rates.  As  the  Supreme  Court  clearl}^  states,  it  did  not  attempt 
to  decide  how  much  of  the  Master's  value  of  the  tangible  property 
should  have  been  diminished  by  the  depreciation  which  the 
property  had  undergone,  stating  it  would  be  improper  that 
"  the  amounts  of  complete  and  incomplete  depreciation  should  be 
added  to  the  present  value  of  the  surviving  parts"  in  order  to 
obtain  the  total  plant  value  to  be  used  as  a  basis  of  rate  making. 
This  position  is  further  explained  by  the  following  quotation: 

"The  cost  of  reproduction  is  one  way  of  ascertaining  the  present 
value  of  a  plant  like  that  of  a  water  company,  but  that  test  would  lead 
to  obviously  incorrect  results  if  the  cost  of  reproduction  is  not  diminished 
by  the  depreciation  which  has  come  from  age  and  use."^ 

Is  it  not  clear  that  in  this  case  the  Supreme  Court  consistent 
with  its  decision  in  the  Consolidated  Gas  case  was  pointing 
out  that  such  deterioration  as  that  due  to  complete  depreciation 
also  "use"  that  is,  wear  and  tear,  also  deferred  maintenance, 
inadequacy,  obsolescence,  age — in  the  sense  that  the  life  had  com- 
pletely expired — must  be  estimated  and  deducted  from  replace- 
ment cost  in  determining  fair  present  value?  If  not,  and  the 
Knoxville  Water  case  properly  construed  means  that  present 
value  is  to  be  obtained  by  deducting  the  theoretical  depreciation 
from  cost,  how  is  it  made  consistent  with  the  decision  in  the  gas 
case? 

It  would  seem  that  however  useful  considerations  of  life 
of  property  may  be  in  establishing  annual  rates  of  deterioration, 
theoretical  depreciation  has  no  place  in  determining  the  basis  for 
fixing  rates  of  return.  If  so,  by  what  method  is  theoretical  de- 
preciation to  be  determined?  At  which  month  in  the  life  of  the 
physical  property  which  extends  over  years  is  the  present  value 
to  be  estimated?  Assume  that  the  life  of  a  large  part  of  a  com- 
plete property  is  20  years,  then  at  the  end  of  19  years  and  6 
months,  if  theoretical  depreciation  is  considered,  the  present 

'  In  the  Knoxville  Water  Case  (City  of  Knoxville  vs.  Water  Company, 
212  U.  S.,  1). 


208  VALUATION  OF  PUBLIC  UTILITIES 

value  of  the  property  would  be  small  and  the  rates  based  thereon 
would  include  nothing  in  the  way  of  return  on  the  large  part 
of  the  property,  still   100  per  cent,  useful,  a  year  thereafter 
the  property  being  entirely  replaced  and  new,  the  rates  would 
be    incomparably    higher    and    between    these    two    extremes, 
the  rates  will  fluctuate  depending  on  the  year  or  the  month 
in  which  the  present  value  is  estimated.     Consider  two  sur- 
face  railways   running   out   parallel   avenues   from   the   center 
of  a  city  to  the  suburbs,  both  alike  in  construction  but  one  10 
years  old  and  the  other  put  in  operation  within  a  year.     If 
theoretical  depreciation  is  considered  the  present  values  of  these 
two  properties  are  quite  different,  the  older  road  being  worth 
appreciably  less  than  the  new  road,  although  the  original  cost  of 
installation  may  have  been  the  same  in  both   cases.     Under 
such  circumstances,  is  the  older  road  to  be  allowed  to  charge 
only  a  four-cent  fare,  assuming  that  that  gives  a  fair  return  on 
the  estimated  present  value,  while  the  new  road  must  charge  a 
five-cent  fare  for  the  same  return  on  its  estimated  value?     What 
would  be  the  result  practically  of  such  method  of  fixing  rates? 
The  old  road  would  be  swamped  with  business  and  the  new  road 
would  be  unable  to  maintain  its  earnings.     Again,  the  theoretical 
present  value  of  the  property  of  a  lighting  company  might  be 
found  to  be  50  per  cent,  of  the  cost  new  but  such  value  would 
not  properly  represent  its  worth  in  service  to  the  public  because 
it  would  probably  be  in  such  poor  condition  that  continuous 
and  satisfactory  service  could  not  be  rendered  and  the  real  worth 
and  service  to  the  public  would  be  very  much  below  50  per  cent. 
On  the  other  hand,  through  extravagant  management,  and  the 
replacing   of    partly  worn  out    apparatus    before  economically 
necessary  and  the  incurrence  of  abnormally  high  maintenance 
charges  in  order  to  maintain  the  theoretical  present  value  of  the 
property  at  say  90  or  95  per  cent.,  there  would  result  unnecessarily 
high  operating  expenses  and  unwarrantable  charges  upon   the 
public  merely  for  the  sake  of  maintaining  a  theoretical   high 
present  value  on  which  a  fair  rate  of  return  must  be   allowed. 
A  property  of  this   kind   maintained   at   an   abnormally    high 
present-value  worth,  would  be  of  no  greater  service  to  the  public 
than  one  of  which  the  present-value  worth  might  be  only  75  per 
cent.,  whereas  the  burden  to  the  public  in  maintaining  the  former 
property  would  be  very  much  higher  than  the  latter.     Can  such 
fanciful  and  variable  bases  be  intended  by  the  Supreme  Court  to 


DEPRECIATION  209 

be  taken  as  that  on  which  rates  are  to  be  estimated  and  regulated? 
Such  conclusion  would  be  illogical,  unreasonable  and  unfair. 
Provided  a  property  is  kept  in  good  order  and  at  100  per  cent, 
working  efficienc}^  so  as  to  render  service  to  the  public  equivalent 
to  that  of  a  new  plant,  the  question  of  rates  or  value  of  property 
in  its  service  to  the  public  has  absolutely  nothing  to  do  with  the 
amount  of  reserve  funds  the  corporation  may  or  may  not  have 
accumulated.  The  value  of  any  physical  property,  as  must  of 
course  be  recognized,  has  no  relation  whatever  to  the  amount  of 
money  a  corporation  may  have  to  its  credit  in  the  bank,  nor  have 
rates  for  service,  as  far  as  we  have  ever  heard,  been  based  on 
the  amount  of  a  company's  surplus  or  reserve  funds.  While 
appraiser  must  be  quick  to  recognize  loss  of  value  where  it  ac- 
tually exists  and  to  make  deductions  for  property  that  has  been 
worn  out  or  superseded,  he  should  not  be  misled  into  including 
hypothetical  or  academic  values. 

The  confused  state  of  mind  that  prevails  with  regard  to  the 
application  of  depreciation  in  determining  present  value,  results 
largely  from  the  misapplication  of  principles  established  by  the 
Courts  in  rate  cases.  These  decisions  expressly  provide  that 
allowances  to  cover  the  deterioration  of  all  sorts  including  ulti- 
mate replacement,  are  to  be  provided  out  of  operating  income; 
citations  supporting  this  view  are  too  numerous  to  mention  but 
a  quotation  from  the  Knoxville  Water  case,  referred  to  above, 
is  particularly  pertinent  in  this  connection. 

"The  company  is  not  bound  to  see  its  property  gradually  waste, 
without  making  provisions  out  of  earnings  for  replacement.  It  is 
entitled  to  see  that  from  earnings  the  value  of  the  property  invested  is 
kept  unimpaired,  so  that  at  the  end  of  any  given  term  of  years,  the 
original  investment  remains  as  it  was  at  the  beginning."' 

In  view  of  the  perplexed  state  of  mind  and  contradictory 
decisions  that  exist,  the  clear  thinking  and  fair  decision  of  the 
St.  Louis  Public  Service  Commission  is  refreshing.  The  quota- 
tion is  a  brief  summary  of  their  method  of  determining  present 
value — which  did  not  include  deductions  for  mere  age — in  fixing 
fair  rates  to  be  charged  by  the  Union  Electric  Light  and  Power 
Company  of  St.  Louis. 

"In  depreciating  to  arrive  at  the  present  value  of  the  depreciable 
property,  the  Commission  does  not  consider  it  fair  to  make  deductions 

1  Knoxville  vs.  Water  Company  212  U.  S.,  1. 

14 


210  VALUATION  OF  PUBLIC  UTILITIES 

for  anything  but  the  present  physical  condition,  and  for  items  where  it 
is  plainly  apparent  that  the  property  has  become  obsolete  or  inadequate. 
The  usual  estimate  of  the  life  of  different  parts  of  a  public  service  prop- 
erty, so  far  as  they  deal  with  obsolescence  or  inadequacy,  are  extremely 
problematical  and  these  elements  should  not  be  generally  taken  into 
account  in  determining  present  value.'" 

Appreciation. — It  is  usually  held  that  if  corporation  property 
is  debited  with  depreciation,  it  should  be  credited  with  apprecia- 
tion. From  a  superficial  consideration,  this  would  seem  to  be 
fair,  and  logical,  but  as  a  matter  of  fact,  appreciation  is  not  the 
antithesis  of  depreciation,  as  generally  used.  There  are  certain 
items  of  property  which  increase  or  appreciate  in  value,  such  as 
road-bed,  or  real  estate,  cjuite  independently  of  its  life,  whereas, 
plants  depreciate  through  deterioration,  not  by  reason  of  reduc- 
tion in  value.  Thus  it  will  be  seen  that  there  would  be  no  proper 
use  of  the  term  "depreciation,"  in  reference  to  real  estate.  The 
Courts  have  generally  recognized  appreciation  in  all  values, 
based  on  cost  of  reproduction,  or  present  value,  as  properly 
included  as  a  part  of  capitalization. 

"When  property  is  valued  for  the  purpose  last  stated,  it  is  clear  that 
the  owner  thereof  is  entitled  to  the  benefit  of  any  appreciation  in  value 
above  the  original  cost  and  the  cost  of  improvements,  which  is  due  to 
what  may  be  termed  natural  causes.  If  improvements  made  in  the 
vicinity  of  the  property,  the  growth  of  city  or  town  where  it  is  located, 
the  building  of  railroads,  the  development  of  the  surrounding  country 
and  other  like  causes,  give  property  an  increased  value,  the  owner  can- 
not be  deprived  of  such  income  by  legislative  action  which  prevents  him 
from  reahzing  an  income  commensurate  with  the  enhanced  value  of  his 
property."^ 

Public  Service  Commissions  in  some  instances  have  considered 
that  appreciation  or  increase  -in  value  should  be  credited  to 
income,^  or  carried  as  a  surplus;  eventually  such  appreciation 
carried  as  surplus  would  go  to  stockholders  as  dividends  or  pro- 
ceeds, in  case  the  property  were  sold,  but  under  the  latter  condi- 
tion the  purchasers  would  be  obliged  to  capitalize  the  apprecia- 

'  Report  of  St.  Louis  Public  Service  Commission  to  the  Municipal  As- 
sembly of  St.  Louis  on  Rates  for  Electric  Light  and  Power,  1911. 

2  Getting  vs.  Kansas  City  Stock  Yards.     82  Fed.,  839. 

'Case  No.  1260.  E.  G.  Baltz  vs.  Brooklyn  Borough  Gas  Company.  Case 
No.  1273.  J.  G.  Mayhew  vs.  Kings  County  Lighting  Company.  Public 
Service  Commission,  First  District,  New  York. 


I 


DEPRECIATION  211 

tion  so  that  there  would  seem  to  be  no  objection  to  doing  this  at 
any  time  the  amount  of  appreciation  was  determined. 

Fifty  Per  Cent.  Method. — An  approximate  but  quick,  conven- 
ient and  inexpensive  method  of  estimating  theoretical  deprecia- 
tion of  certain  classes  of  physical  property  has  been  used  in  some 
utility  appraisals  and  may  be  called  ''The  Fifty  Per  Cent. 
Method."  While  the  method  or  slight  modifications  of  it  may 
be  fair  under  certain  conditions,  it  is  not  generally  applicable 
and  must  be  used  with  discretion.  The  system  was  originally 
suggested  from  a  consideration  of  the  mortality  or  life  tables 
used  by  the  Insurance  Companies,  which  are  based  on  average 
results.  The  theory  of  figuring  depreciation  based  on  "  mortality 
tables  of  structures,"  is  clearly  set  forth  in  the  quotation  from 
the  report  of  the  Railroad  Commission  of  Washington  in  the 
following  pages.  As  a  general  rule,  it  may  be  accepted  that  it  is 
never  desirable  to  determine  depreciation  without  a  more  or  less 
complete  inspection  of  the  physical  condition  of  the  property 
under  consideration,  but  the  Fifty  Per  Cent.  Method  by  reason 
of  its  simplicity  and  prompt  derivation  of  results,  its  freedom 
from  any  reliance  on  individual  judgment  or  bias  when  sup- 
ported by  some  necessary  inspection  has  strong  claims  to  pro- 
nounced advantages  for  certain  work  and  in  any  case  may  be  a 
desirable  check  to  other  methods.  It  has  been  used  by  Professor 
M.  E.  Cooley  in  connection  with  his  figuring  depreciation,  in  the 
Michigan  State  appraisal,  B.  J.  Arnold,  for  estimating  theoretical 
depreciation  in  connection  with  appraisal  work  he  did  for  the 
Public  Service  Commission,  First  District,  State  of  New  York, 
the  writer  in  a  similar  way  in  the  preparation  of  statements  sub- 
mitted at  hearings  before  the  Public  Service  Commission  in 
connection  with  the  reorganization  of  the  Third  Avenue  Railway 
in  New  York  City,  and  the  general  principles,  somewhat  modified, 
by  H.  P.  Gillette  in  the  appraisal  work  he  conducted  for  the  State 
of  Washington.  It  has  also,  as  a  method,  been  approved  by  the 
Master  Car  Builders'  Association,  in  connection  with  the  appraisal 
of  rolling  stock. 

To  apply  the  Fifty  Per  Cent.  Method  of  estimating  theoretical 
depreciation,  it  will  be  recognized  that  a  fundamental  principal 
for  its  use  is  that  the  property  being  depreciated  shall  include  a 
large  number  of  similar  parts,  all  of  which  are  subject  to  practi- 
cally the  same  rate  of  deterioration.  For  example,  in  its  appli- 
cation to  a  transmission  line,  the  poles  all  should  be  of  the  same 


212  VALUATION  OF  PUBLIC  UTILITIES 

material,  wood  or  iron,  with  cross  arms  of  similar  character  and 
of  approximately  uniform  dimensions  and  the  installation  must 
have  been  made  for  a  sufficiently  long  period  to  insure  that  the 
annual  expense  for  maintenance  and  repair  is  practically  uniform. 
This  condition  is  only  reached  after  property  has  been  in  use  a 
considerable  length  of  time,  certainly  5  and  preferabl}'  10  or 
15  3'ears  in  the  instance  cited,  so  that  the  parts  are  being  re- 
newed piece-meal  and  it  is  possible  to  find  some  poles,  cross 
arms  and  braces  just  ready  to  be  replaced,  others  new,  having 
been  replaced  within  a  few  days  or  weeks,  and  between  these 
extremes,  all  stages  or  conditions.  Other  classes  of  property  to 
which  this  method  of  depreciation  might  be  applied  are  rails, 
ties,  the  similar  sizes  of  transformers,  meters,  arc  lamps,  boiler 
tubes,  street  railway  motors,  etc.  It  has  been  argued  that 
the  rule  could  not  be  properly  applied  to  small  transformers, 
meters  and  arc  lamps,  because  these  are  replaced  largely  through 
obsolescence,  but  the  cost  of  replacement  when  eventually 
renewed,  does  not  effect  the  value  at  the  time  of  the  appraisal, 
because,  if  the  apparatus  under  consideration  is  obsolete,  the 
value  thereof  must  be  taken  as  scrap  value,  and  if  the  apparatus 
is  not  obsolete,  its  value  might  be  an  average  condition  determin- 
able by  the  application  of  the  Fifty  Per  Cent.  Method.  In  the 
application  of  this  rule  to  boiler  tubes,  for  example,  it  would 
probably  be  necessary  to  ascertain  by  inspection  whether  all  the 
tubes  could  be  taken  collectively,  as  in  an  average  condition,  an 
inspection  of  boilers  might  prove  that  only  those  tubes  in  the 
lower  first  or  second  rows  were  being  replaced  and  that  the  upper 
tubes  would  last  indefinitely,  so  that  the  Fifty  Per  Cent,  rule 
could  only  fairly  be  applied  to  the  lower  tubes  being  replaced. 
In  the  same  way  it  may  be  found  that  mains  and  services  of  a 
Gas  Company,  in  certain  localities,  depreciate  fairly  rapidly,  due 
for  example  to  electrolysis  and  therefore  to  depreciate  the  whole 
property,  50  per  cent,  would  be  absurd.  The  essential  con- 
sideration in  the  use  of  the  Fifty  Per  Cent.  Method  is  that  all  parts 
of  the  property  have  been  at  least  once  renewed,  contain  a  large 
number  of  similar  parts  and  the  annual  maintenance  account  has 
reached  a  fairly  uniform  amount.  It  will  be  seen  that  the  method 
is  at  once  fallacious  if  applied  to  the  buildings  of  a  corporation 
which  owns  a  few  buildings,  because  all  parts  would  not  have 
been  renewed,  no  repair  account  would  reach  its  normal  maxi- 
mum which  had  not  included  the  renewal  of  each  building;  at 


DEPRECIATION  213 

least  once,  and  each  separate  building  would  probably  be  quite 
distinctive  and  unlike  every  other  building  so  that  none  of  the 
conditions  under  which  the  rule  is  applicable  obtain.  In  the 
same  way  the  rule  ordinarily  could  not  be  applied  even  to  engines 
or  generators,  because  usually  they  are  too  few  in  number — 
except  for  the  very  largest  organizations — to  permit  their  being 
replaced  without  abnormally  affecting  the  amount  annually 
appropriated  on  account  of  depreciation. 

The  net  result  of  the  application  of  the  Fifty  Per  Cent.  Method  is 
at  once  apparent;  50  per  cent,  of  the  cost,  less  salvage,  will  be 
immediately  written  off  as  depreciation. 

The  use  of  the  Fifty  Per  Cent.  Method  demonstrates  very 
clearly  that  it  applies  to  theoretical  depreciation  only.  It  has 
been  suggested  that  when  the  Receiver  of  the  Third  Avenue 
Railroad  Company  of  New  York  refused  to  provide  a  fund  for 
depreciation  on  the  basis  that  all  deterioration  in  such  a  large 
property  was  properly  being  charged  as  the  maintenance,  he 
therefore  applied  the  Fifty  Per  Cent.  Method  to  his  entire  system 
and  "  in  effect  inventories  his  property  then  and  there  at  50  per 
cent,  of  its  replacement  value."  Such  method  of  appraisal,  in 
determining  the  present  value,  would,  by  a  most  cursory  exami- 
nation of  the  property,  demonstrate  as  well  as  anything  can,  that 
"theoretical  depreciation"  is  purely  theoretical. 

In  the  appraisal  made  by  Mr.  H.  P.  Gillette  for  the  Railroad 
Commission  of  the  State  of  Washington,  a  modification  of  the 
Fifty  Per  Cent.  Method  was  used  in  determining  depreciation, 
through  the  application  of  what  he  termed  ''mortality  tables  of 
structures."  The  method  used  is  fully  explained  in  the  Commis- 
sion's Report  as  follows: 

"In  estimating  the  present  or  depreciated  value  of  structures,  rolling 
stock,  etc.,  both  Michigan  and  Wisconsin  had  sent  experts  into  the  field 
to  estimate  the  percentage  of  present  value  of  each  unit.  In  this  man- 
ner 40,000  freight  cars  were  inspected  in  Michigan,  and  their  'present 
value'  estimated.  To  me  this  seemed  to  be  not  only  a  useless  procedure, 
but  very  erroneous.  Aside  from  the  great  expense  of  thus  inspecting 
each  car  and  structure,  I  was  influenced  by  a  belief  in  the  far  greater 
accuracy  of  applying  what  might  be  termed  'mortality  tables  of  struc- 
tures.' If  the  age  of  a  man  is  known,  his  expectations  of  life  can  be 
estimated  from  mortality  tables.  Insurance  companies  do  not  have 
their  doctors  guess  at  the  man's  probable  life.  The  doctor  merely 
reports  the  man  as  not  suffering  from  disease,  and  the  insurance  com- 


214  VALUATION  OF  PUBLIC  UTILITIES 

pany  having  the  man's  age,  apphes  its  mortaUty  tables.  In  hke  manner, 
it  seemed  to  me,  the  'present  value'  of  a  car  or  locomotive  could  be 
accurately  estimated  if  its  present  age  were  known.  It  is  a  well-estab- 
lished fact  that  a  freight  car  has  a  useful  life  exceeding  20  or  25  years. 
If  the  average  car  has  a  life  of  25  years,  it  loses  4  per  cent,  of  its  life  every 
year.  Hence  by  multiplying  its  age  in  years  by  4  per  cent.,  its  lost  life 
or  depreciation  is  accurately  ascertained;  and,  by  subtracting  this  de- 
preciation from  100,  the  remainder  will  give  its  'present  value'  expressed 
as  a  i^ercentage  of  its  value  new. 

"I  believed  that  it  would  be  far  less  expensive  to  ascertain  the  age 
of  each  car  and  each  structure  from  the  records  of  the  companies,  and  to 
estimate  the  present  value  by  the  methods  just  explained  than  to  inspect 
each  structure  in  the  field.  This  proved  to  be  the  case,  and  it  effected  a 
very  substantial  saving  in  the  cost  of  the  appraisal,  while,  at  the  same 
time,  it  yielded  more  reliable  results. 

"In  some  cases  the  records  in  the  engineering  office  of  the  railways  did 
not  show  the  ages  of  existing  structures,  but  in  such  cases  their  account- 
ing records  showed  the  dates  when  structures  were  built,  or  when  cars 
were  purchased. 

"If  practically  all  the  structures  shown  in  the  accounting  records  are 
still  in  existence,  and  the  money  expended  each  year  for  each  class  of 
structure  is  known,  it  is  a  very  simple  matter  to  figure  the  average  age 
of  the  money  invested  in  such  structures  which,  after  all,  is  what  is 
needed  in  estimating  present  value.  To  illustrate,  suppose  there  are  a 
number  of  station  buildings  in  existence,  whose  age  is  not  known. 
Suppose,  however,  that  $10,500  was  spent  for  such  buildings  in  1896, 
$20,000  in  1900,  and  $5000  in  1902.  Then  in  1906,  the  average  age  of 
the  money  invested  in  these  buildings  is  ascertained  thus: 

$10,500X10  yrs.  equals  $105,000  one  year. 

$20,000  X  6  yrs.  equals    120,000  one  year. 

$5,000  X  4  yrs.  equals      20,000  one  year. 

"This  gives  a  total  of  $35,500  invested  seven  years;  for  $245,000 
divided  by  35,500  gives  seven  years  approximately. 

"This  rule  to  be  followed  in  all  such  cases  is  to  multiply  the  money 
expended  each  year  for  structures  of  a  given  class  by  the  age  in  years, 
add  all  these  products  together,  and  divide  by  the  total  cost  of  all  the 
structures  under  consideration.  The  quotient  is  the  average  age  of  all 
the  structures,  or,  more  strictly  speaking,  the  average  age  of  the  money 
invested  in  the  structures.  If  some  of  the  structures  are  no  longer  in 
existence,  this  method  can  still  be  applied.  Take  railway  cross-ties 
for  example.  Ascertain  the  total  value  of  cross-ties  in  the  track,  then 
go  back  through  the  records  of  the  tie  renewals,  by  years,  until  the  total 
cost  of  the  renewals  adds  up  to  the  total  value  of  ties  now  in  the  track. 


DEPRECIATION  215 

Then  compute  the  average  age  as  above  shown.  If  the  price  of  ties  has 
fluctuated,  ascertain  the  actual  price  paid,  and  reduce  all  yearly  expendi- 
tures for  renewals  to  the  present  price."  ^ 

DEPRECIATION  OF  NON-PHYSICAL  VALUES 

The  percentages  added  to  structural  costs  to  cover  engineering, 
incidentals,  contingencies,  etc.,  in  order  to  obtain  the  total  value 
of  the  physical  property  have  usually  been  considered  an  inherent 
part  of  the  cost  of  the  physical  property  and  treated  as  such  in 
connection  with  its  depreciation.  As  applied  to  certain  parts  of 
the  property,  this  method  of  figuring  depreciation  is  undoubtedly 
a  correct  procedure  and  for  the  sake  of  simplicity  and  consist- 
ency may  be  recommended,  but  as  a  matter  of  fact,  the  invest- 
ment necessarily  made  for  the  original  engineering  in  connection 
with  certain  parts  of  the  physical  equiprpent,  for  example,  road- 
bfed  and  track,  still  remains  there  and  is  as  much  a  part  of  the 
property  as  the  real  estate,  although  the  rails  and  ties,  which 
have  been  cited,  may  have  been  many  times  relain  and  paid  for 
out  of  and  as  a  part  of  operating  expenses.  It  would  seem  less 
unreasonable  to  leave  such  engineering  investments  undepre- 
ciated than  it  is  to  leave  undepreciated  expenditures,  which 
when  made  have  nothing  physical  to  show  for  the  investment. 
For  example,  in  building  the  street  railways,  with  trolleys  running 
in  conduits  beneath  the  surface  of  the  streets  in  New  York  City, 
it  was  first  necessary  to  remove  pipe  lines,  sewers,  and  in  at 
least  one  instance  a  bank  vault,  in  order  to  make  room  in  the 
streets  for  the  conduits.  Such  work  involved  tearing  up  pave- 
ments beyond  lines  necessary  for  the  track  itself,  often  from 
curb  to  curb'.  The  money  once  expended  for  such  work  was  lost 
to  the  investor,  as  far  as  having  any  property  to  show  therefor, 
for  of  course  the  pavements,  sewers  and  pipes  belong  to  the  city 
or  other  corporations  and  being  left  outside  the  right  of  way  did 
not  make  apparent  the  expense  involved  in  their  removal.  Yet 
in  valuing  the  properties  of  the  railway  companies  in  New  York, 
the  Public  Service  Commission,  First  District,  recognized  the 
class  of  investment  referred  as  a  very  proper  and  necessary  one 
and  allowed  full  value  therefor  both  in  estimated  costs  new  and 
depreciated  values  of  the  property,  as  shown  in  Exhibit  No.  57, 
Chapter  IX. 

1  Second   and   Third   Annual   Reports   of  the   Railroad   Commission   of 
Washington,  pages  132  and  133. 


216  VALUATION  OF  PUBLIC  UTILITIES 

Similarly,  it  will  be  seen  there  exists  no  necessary  reason  why 
"Development  Expenses"  and  "Going  Value"  of  a  property 
must  be  depreciated  because  the  physical  property  may  show 
deterioration.  In  fact  "Development  Expenses"  are  not  ordi- 
narily depreciated  in  the  same  way  as  the  physical  property, 
though  some  authorities  have  indicated  such  procedure  as  proper. 

It  has  been  held  by  some  that  the  discount  on  securities  should 
be  written  off  at  the  same  rate  as  depreciation  of  the  physical 
property;  but  there  is  of  course  no  rational  connection  between 
the  two  and  the  more  usual  plan  is  to  amortize  such  necessary 
discounts  at  a  different  rate,  determined  by  the  life  of  the  bonds, 
for  example,  50  years,  whereas  the  depreciation  of  the  physical 
property  would  have  to  be  based  on  its  rate  of  deterioration 
through  life,  which  the  Wisconsin  Commission  reports  to 
average  for  electric  lighting  properties,  17.46  years,  telephone 
plants  11.24  years,  and  electric  railways,  18.02  years. 

The  Wisconsin  Commission  makes  a  practice  of  depreciating 
the  usual. 10  per  cent,  or  12  per  cent,  added  to  cover  engineering 
incidentals  and  interest  at  the  same  rate  as  the  physical  property 
is  depreciated.  If  the  present  or  depreciated  value  of  a  property 
is  estimated  to  be  three-quarters  of  the  cost  of  reproduction  new, 
taking  the  base  figures  before  percentages  are  allowed,  then  only 
9  per  cent,  of  the  cost  new,  or,  in  the  illustration  given,  12  per 
cent,  of  the  depreciated  value  (assuming  12  per  cent,  has  been 
used  in  estimating  the  cost  new)  would  be  added  to  the  depre- 
ciated figures  to  obtain  the  total  value  of  the  depreciated 
property. 

SUMMARY 

The  principal  features  to  be  considered  in  estimating  deprecia- 
tion may  be  summarized  as  follows: 

(1)  The  rate  of  depreciation  adopted  in  estimating  and  provid- 
ing for  annually  accruing  depreciation  must  not  be  confused 
with  the  total  sum  of  depreciation  in  physical  property,  which 
latter  is  an  estimate  for  a  given  time. 

(2)  The  difference  between  absolute  and  theoretical  deprecia- 
tion should  be  recognized  and  the  amounts  of  each  separately 
estimated.  If  both  are  to  be  considered  their  sum,  not  one  or 
the  other,  is  to  be  taken. 

(3)  Theoretical  depreciation  should  be  assumed  and  provided 
for  as  a  part  of  operating  expense  if  capital  is  to  remain  unim- 


I 


DEPRECIATION  217 

paired  and  rates  are  to  give  the  maximum  service  at  the  minimum 
expense. 

(4)  Service  value,  determined  from  a  consideration  of  the 
"absolute"  not  the  "theoretical"  depreciation  of  physical  prop- 
erty, is  to  be  used,  in  connection  with  certain  proper  non-physical 
values  such  as  development  expense,  going  value,  franchises,  if 
any,  etc.,  in  determining  the  basis  of  value  of  an  operating 
property  in  good  condition. 

(5)  While  usually  preferable,  there  exists  no  necessary  reason 
for  always  writing  off  certain  costs  such  as  engineering,  inciden- 
tals, etc.,  at  the  rate  at  which  the  physical  property,  of  which 
they  were  originally  an  inherent  part,  is  depreciated. 

(6)  Development  expenses  bear  no  fixed  relation  to  the  cost 
of  the  physical  property  and  their  amortization  has  no  necessary 
relation  to  the  rate  of  depreciation  of  the  physical  property. 

(7)  The  amount  of  depreciation  of  physical  property  can  only 
be  accurately  determined  by  more  or  less  detailed  inspection  on 
the  part  of  competent  and  conscientious  engineers. 


CHAPTER  IX 

APPRAISALS    OF   PUBLIC    UTILITY   PROPERTIES   IN   GREATER 

NEW  YORK 

Consideration  of  the  valuations  which  have  recentl}^  been 
made  of  utility  properties  in  New  York  City  is  particularly 
interesting  and  instructive  for  the  following  reasons: 

(a)  The  appraisals  include  some  of  the  largest  electric  street 
railway  systems  in  existence  and  also  cover  valuations  of  some 
important  gas  and  ele^ric  properties. 

(6)  The  appraisals  are  the  basis  of  decisions  of  the  Public 
Service  Commission  which  are  far  reaching  in  result  and  of  great 
financial  importance. 

(c)  The  appraisals  were  made  by  several  different  experts 
as  well  as  the  engineers  of  the  Commission  so  that  a  direct  com- 
parison of  methods  and  results  is  obtainable. 

(d)  The  appraisals  were  wrought  out  with  the  greatest  detail 
and  care  with .  respect  to  the  working  up  of  unit  prices  and 
percentage  allowances  for  engineering,  omissions  and  incidentals 
as  well  as  "Development  Expenses." 

(e)  The  appraisals  developed  the  most  recent  methods  in 
valuation  work  and  those  features  which  are  common  to  all  the 
appraisals  may  be  taken  as  the  standard  of  the  best  practice  at 
the  present  time. 

The  foregoing  is  sufficient  explanation  for  the  introduction 
in  this  volume  of  many  exhibits  in  toto  and  parts  of  others 
taken  from  the  testimony  in  the  cases  to  which  reference  is  made. 

Third  Avenue  Railroad  Company. — The  property  of  the  old 
Third  Avenue  Company,  with  its  nine  subsidiary  corporations, 
comprising  272  miles  of  street,  single  track  together  with  real 
estate,  buildings,  power-plant,  distributing  system'  and  rolling- 
stock  was  in  the  hands  of  a  Receiver  when  the  Bond-holders 
Committee  on  Reorganization  applied  to  the  Public  Service  Com- 
mission of  New  York,  First  District,  for  approval  of  a  proposed 
plan  of  reorganization  and  capitalization  of  the  property.  The 
Commission  having  indicated  that  any  proposed  plan  of  capital- 

218 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     219 

ization  to  be  approved  by  it  must  bear  a  proper  relation  to  the 
real  value  of  the  property,  the  author  was  retained  in  behalf  of 
the  Bond-holders  to  prepare  and  submit  figures  under  oath,  at 
hearings  before  the  Commission,  as  to  the  value  of  the  Railroad 
Company's  property,  both  tangible  or  physical  and  intangible 
or  non-physical.  On  the  following  pages.  Exhibits  No.  35  and 
No.  36,  are  given  rather  fully  the  valuations  prepared  and  sub- 
mitted to  show  the  value  of  all  the  properties,  including  the 
subsidiary  companies,  on  the  basis  of  Cost  to  Reproduce  New. 
The  values  in  Exhibit  No.  35  include  10  per  cent,  payment  to  a 
general  contractor,  to  cover  his  charges  for  services  in  overseeing 
and  carrying  out  the  general  contract,  payment  for  his  knowledge 
and  experience,  his  own  office  expenses  and  the  like,  which  has 
been  added  in  the  case  of 

Buildings  and  Structures,  Duct  Lines, 

Track,  including  Special  Work,  Power  Equipment, 

Pavements,  Removal  of  Obstructions, 

Distribution  Systems,  Pavement  over  Obstructions. 
Overhead  Construction, 

In  the  actual  electrification  of  the  larger  part  of  the  Third 
Avenue  Company's  tracks,  costing  several  million  dollars,  the 
general  contractor  was  paid  10  per  cent,  on  the  cost  of  all  material 
and  15  per  cent,  on  the  payments  for  all  labor  that  entered  into 
the  work. 

Exhibit  No.  36  gives  the  sum  of  the  values  set  forth  in  Exhibit 
No.  35  with  15  per  cent,  added  for  engineering,  incidentals, 
omissions,  etc.,  to  certain  items,  namely: 

Buildings  and  Structures,  Duct  Lines, 

Track,  including  Special  Work,  Power  Equipment, 

Pavements,  Rolling  Stock, 

Distribution  Systems,  Removal  of  Obstructions, 

Overhead  Construction,  Pavement  over  Obstructions. 

•The  15  per  cent,  allowance  on  the  items  indicated  was  considered 
sufficient  to  cover  the  total  expense  of  this  class  in  connection 
with  all  items.  To  illustrate,  an  allowance  of  15  per  cent,  on 
the  cost  of  rolling  stock  purchased  from  the  manufacturer  may 
seem  high,  but  no  percentage  has  been  added  to  Real  Estate  or 
Tools  and  Supplies,  to  obtain  which  would  involve  some  expense 
other  than  actual  cost,  so  that  the  15  per  cent,  allowed  on  the 
items  specified  does  not  seem  unreasonable. 


220  VALUATION  OF  PUBLIC  UTILITIES 

On  the  succeeding  pages,  Exhibits  No.  39  and  No.  40  are  the 
estimated  amounts  of  depreciation,  both  "Absolute"  or  accrued 
and  "Theoretical"  or  estimated  as  accruing. 

Exhibit  No.  50  is  the  appraisal  of  the  same  companies'  prop- 
erties prepared  and  submitted  by  the  appraisal  department, 
Mr.  E.  G.  Connette,  in  charge,  of  the  Public  Service  Commission. 
It  will  be  noted  that  the  figures  are  made  up  on  the  basis  of 
subcontractor's  charge,  i.e.,  to  these  figures  are  still  to  be  added 
certain  percentages.  First,  10  per  cent,  to  cover  general  con- 
tractor's charge,  allowed  and  added  to  the  same  items  as  re- 
ferred to  in  connection  with  the  author's  Exhibit  No.  35,  except 
"Obstructions";  second,  10  per  cent,  to  cover  "engineering, 
incidentals,  including  contingencies,  incomplete  inventories  and 
loss  and  wastage  of  material  during  construction,  and  adminis- 
tration expenses"  (Mr.  Connette  testified^  that  it  was  practi- 
cally unnecessary  to  allow  anything  for  omissions  or  errors, 
the  inventory  had  been  so  carefully  checked,  although  in  all 
other  appraisals  submitted  by  him  15  per  cent.,  not  10  per  cent., 
has  been  allowed  for  engineering,  incidentals  and  administration 
expenses,  etc.),  was  added  to 

Buildings  and  Structures,  Overhead  Construction, 

Track,  including  Special  Work,  Duct  Lines, 

Pavements,  Power  Equipment. 

Distribution  Systems, 
To  Rolling  stock  only  5  per  cent,  was  added. 

Exhibit  No.  57  indicates  the  method  of  obtaining  depreciation 
followed  by  the  Commission.  It  will  be  noted  both  absolute 
and  theoretical  depreciation  is  considered  as  having  accrued. 

Exhibit  No.  58  compares  the  estimates  of  both  absolute 
and  theoretical  depreciation  prepared  by  the  author  with  esti- 
mates of  the  Commission  engineers.  The  principal  difference 
between  the  final  results  is  due  to  a  difference  of  50  years  taken 
in  the  estimated  life  of  Buildings  and  Structures.  It  should 
be  noted  that  no  depreciation  or  writing  off  of  investment 
or  capitalization  is  proposed  by  the  Commission  as  regards 
the  items  "Removal  of  Obstructions"  and  "Pavement  over 
Obstructions"  although  the  Company  lost,  absolutely,  all  "right, 
title  and  interest"  in  the  outlay  for  such  constructions  from 

1  Printed  testimony,  p.  919,  Case  1181.  Plan  of  Reorganization,  Third 
Avenue  Railroad  Co.  Public  Service  Commission,  of  New  York,  First 
District. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    221 

the  moment  they  were  completed.  This  is  a  very  sane  and  con- 
servative position  taken  by  the  Commission  but  hardly  one  that 
will  be  commended  by  those  seeking  to  allow  capitalization  of, 
or  rate  of  return  on,  only  physical  property  owned  and  used  by 
corporations  in  the  actual  service  of  the  public. 

In  its  final  decision  of  this  case,  the  Commission  accepted 
$31,600,000  as  the  depreciated  or  present  value  of  the  entire 
physical  property  of  the  Third  Avenue  Railroad  and  its  sub- 
sidiary companies.  This  total  figure  was  obtained  by  using 
their  engineer's  valuation  as  given  in  Exhibit  No.  57,  slightly 
increased  by  certain  allowances  to  cover  additions  to  the  prop- 
erty made  after  the  date  of  the  engineer's  appraisal,  September 
1,  1909,  in  order  to  bring  the  appraisal  up  to  March  1,  1910. 

To  the  value  of  the  physical  property,  the  Commission, 
ignoring  the  testimony  of  the  experts  for  the  Company,  to  refute 
which  no  evidence  was  introduced  in  the  hearings,  added  about  12 
per  cent,  of  their  value  of  the  physical  property,  that  is  $3,500,000 
to  cover  "Development  Expenses"  making  a  total  of  $35,- 
100,000  as  the  aggregate  value  of  the  property.  Basing  their 
opinion  on  such  value  they  refused  the  Bond-holders  appli- 
cation for  approval  of  a  plan  contemplating  the  issuance  of  stock 
and  bonds  to  the  amount  of  $54,916,000  in  addition  to  certain 
underlying  securities  aggregating  in  round  numbers  $12,000,000. 
The  Bond-holders,  refusing  to  accept  the  decision  of  the  Com- 
mission, carried  the  case  to  the  Courts  and  upon  appeal  the  New 
York  Court  of  Appeals  sustained  the  contention  of  the  Bond- 
holders and  instructed  the  Commission  to  approve  the  plan  of 
reorganization  and  the  capitalization  proposed,  on  the  grounds 
that  the  reorganization  of  a  Railroad  Company  in  New  York 
State  was  legal  and  proper  along  lines  proposed  by  the  Third 
Avenue  Bond-holders  and  that  the  Commission  had  no  authority 
in  such  reorganization  cases  to  limit  the  capitalization  to  an 
amount  which  bore,  in  their  opinion,  proper  relation  to  what 
seemed  to  them  the  fair  value  of  the  property. 

Exhibit  No.  69  was  introduced  during  the  testimony  of  the 
author,  acting  in  another  case  for  the  Third  Avenue  Railroad  Com- 
pany's Reorganization  Committee,  in  connection  with  hearings 
before  the  Public  Service  Commission  as  to  their  order  for  the  issu- 
ance of  transfer  tickets  between  the  Third  Avenue,  including  its 
subsidiary  companies,  and  other  intersecting  or  connecting  surface 
lines  on  the  Island  of  Manhattan  (New  York).     It  was  necessary 


222  VALUATION  OF  PUBLIC  UTILITIES 

for  the  Company  to  introduce  evidence  as  to  the  value  of  its 
property  on  Manhattan  in  order  to  justify  its  claim  of  confiscation 
of  property,  if  compelled  to  issue  the  transfers  called  for  in  the 
order  of  the  Commission. 

It  will  be  noticed  the  values  of  the  properties  are  kept  distinct 
and  the  Development  Expenses  are  quite  in  detail.  The  Exhibit 
gives  the  values  relating  to  all  the  physical  property  of  the 
Companies,  some  of  which,  however,  was  not  "used  or  useful" 
for  conducting  the  traffic  under  consideration.  Consequently 
Exhibit  No.  74  was  introduced  to  show  the  value  of  the  prop- 
erty not  at  the  time  used  for  railroad  operation.  It  may  be 
noted  that  even  the  buildings  were  divided  and  the  value  of  the 
part.,  not  used  deducted  from  the  total  value  of  the  property 
given  in  Exhibit  No.  69  in  order  that  only  the  value  of  the  prop- 
erty actually  in  use  should  be  considered.  Exhibits  No.  73  and 
No.  133  are  given  as  typical  detail  sheets  showing  how  the  various 
unit  prices  are  applied  in  deriving  the  totals  shown  in  Exhibits 
No.  35.  No.  36,  No.  69  and  No.  74. 


EXHIBIT  NO.  35,  JANUARY  18,  1910 


PUBLIC  SERVICE  COMMISSION, 
FIRST  DISTRICT 


Application    of   Third   Avenue    Bondholders'    Committee 

Case  No.  1181 


SUMMARY  OF  INVENTORIES 

Forming  Basis  of  Appraisal  by  Henry  Floy,  Consulting 
Engineer  of  Physical  Properties  of  Third  Avenue 
Proper,  42nd  Street,  Dry  Dock,  Union,  Southern 
Boulevard,  Bronx  Traction,  Kingsbridge,  Yonkers 
and  Westchester  Railroad  Companies 


I 

GENERAL  DESCRIPTION 

The  properties  included  in  the  appraisal  lie  mainly  in  the 
Boroughs  of  Manhattan  and   Bronx,  with  a  proportion  in  the 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    223 

Cities  of  Yonkers,  Mt.  Vernon,  New  Rochelle  and  Pelham. 
The  railroad  lines  start  at  the  Post  Office,  lower  Broadway  and 
Park  Row,  and  extend  north  for  a  distance  of  over  20 
miles  in  an  air  line,  and  serve  territory  varying  in  width  from  a 
mile  to  8  miles,  and  aggregating  nearly  one  hundred  (100) 
square  miles  of  the  most  thickly  populated  territory  in  America. 
The  tracks  and  underground  sj^stem  of  trolley  constitute  the 
most  improved  and  at  the  same  time  the  most  expensive  system 
of  electric  track  construction  for  city  conditions,  approximating 
64  miles  in  length  of  single  track.  There  are  about  190  miles  of 
single-track,  overhead,  trolley  construction  of  modern  type,  and 
in  addition,  about  18  miles  of  horse-car  track.  Much  of  the 
rolling  stock  is  new  and  of  the  most  approved  type.  The 
principal  power  station,  located  at  216th  Street  and  the  Harlem 
River,  is  of  recent  construction  and  equipped"  with  modern 
standard  apparatus,  having  an  out-put  capacity  of  35,000 
horse-power.  There  are  seven  substations,  entirely  up-to-date, 
and  sufficient  for  present  requirements;  they  are  all  supplied 
with  electrical  energy  through  high-tension  cables  aggregating 
about  140  miles  in  length,  laid  in  tile,  concreted,  underground 
ducts.  In  Manhattan  the  same  duct  construction  containing 
nearly  200  miles  of  cables  is  used  for  the  distribution  of  all 
current  to  the  underground  trolleys.  The  ducts  vary  in  cross- 
section  from  four  to  fifty  holes,  and  aggregate  about  70  miles,  or 
over  5.000,000  duct  feet. 

The  real  estate,  scattered  throughout  the  territory  served, 
is  conveniently  located  and  aggregates  a  relatively  large  percen- 
tage of  the  total  values  of  the  properties.  The  buildings  are  well 
suited  for  the  purposes  for  which  they  are  being  used,  and  for  the 
main  part  have  been  recently  put  in  complete  repair  under  the 
receiver-ship  of  Mr.  F.  W.  Whitridge. 


224 


VALUATION  OF  PUBLIC  UTILITIES 


II 
SUMMARY  OF  UNITS 

USED     IN     ASCERTAINING     REPRODUCTION     COST     OF     ThIRD     A  VENUE,     42nD 

Street,  Dry  Dock,  Kingsbridge,  Union,  Bronx  Traction,  Southern 
Boulevard,  Yonkers  and  Westchester  Companies'  Buildings 


j  Area  of  real  j    Contents  of 

Ownership  estate  in        buildings  in 

square  feet  j     cubic  feet 


Grand,    Corlears    &     Monroe 
Sts.,  Part  A. 

A  two-story  and  basement  brick  and 
wood  car  barn.  Cost  per  cubic  foot* 
13  cents. 

Grand,    Corlears     &    Monroe 
Sts.,  Part  B. 

Real  estate  for  Part   B   included  in 

Part  A. 
Two-story    brick  and  wood  stable  25 

feet  wide,  running  from  Grand  to 

Monroe  Streets,  cost  per  cubic  foot 

23.5  cents. 


Monroe,  Corlears  &  Cherry  Sts. 

A  two-storj'  brick  and  wood  car  barn 
and  stable.  Cost  per  cubic  foot 
7.6  cents. 


Dry  Dock       13,788 


Drv  Dock 


Dry  Dock       27,875 


244,000 


170.625 


987,000 


Corlears,    Cherry     &     Grand, 
Part  A. 

A  three-story  brick  car  barn  and  stable, 
with  cast  iron  columns,  steel  girders 
and  wooden  floors  and  joists,  with  a 
two-story  brick  and  wood  "  L,"  cost 
per  cubic  foot  11.4  cents. 

Corlears,    Cherry    &    Grand, 
Part  B. 

Real  estate   for  Part   B   included  in 

Part  A. 
A    three -story  brick  and  wood  office 

building,   cost  per  cubic   foot   23.2 

cents. 


Drv  Dock   !    24,220  \    813,300 


Drv  Dock 


150,000 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     225 


Ownership 


Area  of  real 

estate  in 
square  feet 


Contents  of 

buildings 
in  cubic  feet 


Corlears,     Cherry    &     Grand,      Dry  Dock 
Part  C. 

Real   estate   for  Part   C   included   in 

Part  A. 
A  three-story  brick  and  wood  stable, 

cost  per  cubic  foot  16.8  cents. 


208,000 


14th-15th    Sts.,    &    Ave.    B., 
Part  A. 

A  four-story  brick  and  wood  car  barn, 
cost  per  cubic  foot  9.7  cents. 


14th-15th    Sts.,    Ave.     B.,  '    Dry  Dock 
Part  B.  I 

Real   estate   in   Part    B    included    in   | 
Part  A.  I 

A  two-story  brick  and  steel  fireproof 
car  barn.  Building  was  partially 
destroyed  by  fire  before  the  date  of  I 
this  appraisal,  and  the  estimate  in- 
cludes that  part  of  the  building  now 
intact;  cost  per  cubic  foot  17  cents. 

14th-15th    S  t  s.,     A  V  e.     B.,      Dry  Dock 
Part  C. 

Real    estate    in   Part    C    included    in 

Part  A. 
A  part  two-  and  part  three-story  brick 

and  wood  stable,  cost  per  cubic  foot 

9.4  cents. 


Dry  Dock       57,084      1,168,576 


811,688 


544,757 


Bayard,  Elizabeth  &  Bowery. 

A  one-story  basement,  sub-basement, 
stone,  brick  and  steel  fireproof 
building. 

This  building  was  designed  as  a  nine- 
story  basement  and  sub-basement 
fireproof  structure  and  only  one- 
story  basement  and  sub-basement, 
built,  and  was  immediately  used  as  a 
Cable  Power  Station,  with  large 
wheel  vaults  on  Bowery  side  of 
building.  Part  of  the  building  is  at 
present  used  for  Emergency  Crew 
Quarters,  part  by  Rotary  Sub- 
station, and  the  balance  for  com- 
mercial purposes.  Boilers  have 
been  removed,  as  also  the  cable 
machinery,  cost  per  cubic  foot  31.4 
cents. 

15 


3rd  Avenue      20,000      1,522,817 


226 


VALUATION  OF  PUBLIC  UTILITIES 


Ownership 


Area  of  real 

estate  in 
square  feet 


Contents  of 

buildings 

in  cubic  feet 


2nd-3rd      Ave.,      6oth     Sts., 
Part  A. 

A  part  two-  and  part  three-story  and 
basement  brick  and  steel  car  barn, 
and  offices.  A  portion  of  the  Third 
Avenue  front  was  formerly  the  main 
office  of  the  Third  Avenue  Railroad. 

The  vaults  in  Third  Avenue  adjacent 
to  this  part  formerly  used  as  a  Cable 
wheel  vault.  The  masonry  of  the 
tension  pits  of  the  old  Cable  Road 
are  also  included  in  the  cost  to  repro- 
duce; cost  per  cubic  foot  1.3.9  cents. 

2nd-3rd      Ave.,      65th     Sts., 
Part  B. 

Real  estate  in  Part  B  included  in 
Part  A. 

A  one-story  and  basement  brick  and 
steel  fireproof  engine-room,  ^\•ith  a 
three-story  brick  and  steel  fireproof 
extension. 

This  building  was  designed  and  built  as 
a  Cable  Power  Plant  (engine-room 
only),  for  the  Third  Avenue  Road, 
about  1890.  The  cable  machinery 
has  been  removed  and  the  main  floor 
and  messanine  used  for  a  truck  re- 
pair shop.  The  space  under  this 
floor  used  for  general  storage.  The 
three-story  extension  is  used  for  car 
body  repairs.  The  masonry  founda- 
tion for  engine  included  in  the  cost 
to  reproduce;  cost  per  cubic  foot, 
11.6  cents. 

2nd-3rd  Ave.,  65th-66th  Sts., 
Part  C. 

Real  estate  in  Part  C  included  in 
Part  A. 

A  three-story  brick  and  steel  boiler- 
house.  This  part  was  designed  as  a 
boiler-room  and  accessories  of  the 
Third  Avenue  Cable  and  Power 
Plant.  Many  of  the  old  boilers  have 
been  removed ;  building  now  used  as 
a  Rotary  .Sub-station,  sand  dryer, 
storage  and  steam-heating  plant; 
cost  per  cubic  foot,  16.4  cents. 


3rd  Avenue 


122,508 


4,425,106 


3rd  Avenue 


3rd  Avenue 


4,035,67J 


1,530,150 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     227 


Ownership 


Area  of  real  Contents  of 

estate  in  buildings 

square  feet  in  cubic  feet 

1 


129th-130th,   3rd-Lex.    Ave.,    3rd  Avenue 
Part  A. 

A  four-story  and  basement  brick  and 
steel  fireproof  office  building. 

Originally  built  in  1880  as  a  hotel,  was, 
previous  to  the  date  of  this  ap- 
praisal, gutted  by  fire;  the  walls 
were  repaired  and  strengthened 
and  used  as  a  part  of  the  new  fire- 
proof building.  Rebuilt  in  1908, 
except  the  walls  and  foundations,  as 
noted  above.  At  present  used  for 
general  offices  for  the  Third  Avenue 
Railroad  Company;  cost  per  cubic 
foot,  25.8  cents. 


129th-130th,   3rd-Lex.    Ave.,  i  3rd  Avenue 
Part  B.  1 


Real  estate  in  Part  B  included  in 
Part  A. 

A  four-story  brick  and  steel  fireproof 
car  barn.  Originally  built  in  1880 
as  a  theater,  was,  previous  to  the 
date  of  this  appraisal,  gutted  by  fire; 
the  walls  were  repaired  and  strength- 
ened and  used  as  a  part  of  the  new 
fireproof  building.  Rebuilt  in  1908, 
except  walls  and  foundations,  as 
noted  above.  The  facade  similar  to 
Part  A.  Cost  per  cubic  foot,  12 
cents. 


75.687 


129th-130th,   3rd-Lex.    Ave., 
Part  C. 

Real  estate  in  Part  C  included  in 
Part  A. 

A  three-story  brick  and  steel  car  barn. 
This  building  was  originally  of  wood 
construction.  In  1890  the  interior 
was  removed  and  made  fireproof 
construction;  cost  per  cubic  foot, 
11.2   cents. 


3rd  Avenue 


431,900 


449,715 


3,116,390 


228 


VALUATION  OF  PUBLIC  UTILITIES 


Area  of  real     Contents  of 
Ownership        I     estate  in  buildings 

square  feet     in  cubic  feet 


W.    128th   St.,    129th   St.,    &' 3rd  Avenue     39,9G7     3,275,640 
Amst.  Ave. 

A  three-story  and  basement  brick  and 
steel  fireproof  car  barn  and  sub- 
station. This  building  originally 
was  erected  in  18S6.  Modified,  ex- 
tended and  largely  rebuilt  in  1905. 
At  one  time  used  as  a  Cable  Power 
station,  with  cable  wheel  vaults  in  i 
Amsterdam  Avenue;  cost  per  cubic 
foot,  13.8  cents. 


129th    St.-130th   Sts.,    E.    of    3rd  Avenue     29,816 
Amst.  Ave.  I  1 

A  one-story  steel  frame  and  corrugated 
iron  car  barn.  This  building  was 
originally  erected  for  a  tempo- 
rary boiler  house  for  cable  power 
while  the  building  on  the  opposite 
side  of  129th  Street  was  in  process  of 
construction;  later  converted  into  a 
car  barn  and  repair  shop,  cost  per 
cubic  foot  8.5  cents. 


12th    Ave.   &   Manhattan  St. 
Part  A. 

A  one-story  frame  shack,  used  as  a 
starter's  office,  cost  per  cubic  foot 
21  cents. 


937.500 


42nd  Street 


74 


12th   Ave. 
Part  B. 


&   Manhattan  St.    42nd  Street 


Real  estate   for  Part   B   included  in 

Part  A. 
A  one-story  frame  shack,  used  as  a 

restaurant,  cost  per  cubic  foot  5.8 

cents. 


Amst.  Ave.  &  186th  St 3rd  Avenue      16,350 

A   one-story   frame   stable   with   two 

small  shacks   adjoining.     Stable  is  1 

leased  for  commercial  purposes,  cost 
per  cubic  foot  6.2  cents. 


250 


3,750 


97,000 


9th-10th  Ave.,216th-218thSts.  3rd  Avenue 

A  two-story  brick  car  barn  wth  steel 
roof  trusses,  corrugated   iron  roof, 
and  fireproof  floor.     Entire  building 
is  u.sed  for  storage  of  cars,  cost  per  . 
cubic  foot  6.1  cents. 


125,948      5,409,300 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    229 


Area  of  real     Contents  of 
Ownership  estate  in  buildings 

square  feet     in  cubic  feet 


216th-218th  Sts.,    9th    Ave.-    3rd  Avenue    135,000 
River 

A  one-story  brick,  stone  and  steel  fire- 
proof power-house. 

This  is  the  main  power-house  of  the 
Third  Avenue  Railroad  Company. 
It  is  to  be  noted  that  the  foundations 
are  installed  for  a  building  one-third 
larger  than  erected,  cost  per  cubic 
foot  17  cents. 


2 loth  St.  &  Karlem  River 

Xo  building  on  this  tract. 

42nd  St. ,  bet.  Park  &  Lex.  Aves. 

A  four-story  brick  loft  building,  with 
cast  iron  columns,  steel  girders  and 
wood  floors  and  joists.  At  one  time 
used  as  general  offices  of  the  42nd, 
Manhattanville  and  St.  Nicholas 
Avenue  Railroad  Company.  Entire 
building  now  leased  for  commercial 
purposes,  cost  per  cubic  foot  11.8 
cents. 


3rd  Avenue       7,500 


42nd  Street  i      4,938 


6.557,000 


268,000 


129th-130th  Sts.  &  Manhattan 
St.,  Part  A. 

A  four-story  brick  and  steel  fireproof 
car  barn.  This  building  was  origin- 
ally of  brick  and  wood.  The  entire 
contents  being  gutted  was  replaced 
by  modern,  strictly  fireproof  con- 
struction. The  old  walls  and  foun- 
dations being  strengthened  and  re- 
paired. It  is  not  yet  completed  and 
no  cars  have  yet  been  stored  therein, 
cost  per  cubic  foot  11.3  cents,  as  of 
to-day. 


42nd  Street      28,846      1,217,300 


129th-130th  Sts., &  Manhattan 
St.,  Part  B. 

Real   estate  for  Part   B   included  in 

Part  A. 
A  three-story  brick  and  wood  stable, 

leased     for     commercial     purposes. 

Erected  in  1885,  cost  per  cubic  foot 

11.1  cents. 


42nd  Street 


595,000 


230 


VALUATION  OF  PUBLIC  UTILITIES 


Area  of  real     Contents  of 
Ownership       I     estate  in  buildings 

square  feet  1  in  cubic  feet 


So.  Boulevard  &  3rd  Avenue.  . 

A  one-story  brick  and  wood  stable.  A 
large  yard  adjoins  this  building 
which  is  used  for  the  storage  of 
wagons,  and  old  material,  cost  per 
cubic  foot  19.5  cents 

137th-138th  St.  E.  of  Willow 
Ave. 

A  one-story  brick  and  steel  car  barn, 
with  steel  roof  trusses,  and  tar  and 
gravel  roof,  cost  per  cubic  foot  6.5 
cents. 

E.  172nd    St.  &  West   Farms 
Road. 

A  two-story  brick  and  steel  fireproof 
power-house.  This  building  was 
originally  the  main  power-house  of 
.  the  Union  Railway  Company. 
Erected  in  1892,  cost  per  cubic  foot 
9.5  cents. 

Boston  Rd.,  175th  St.  &  So. 
Boul'd.     Part  A. 

A  one-story  brick  car  barn,  with  cast 
iron  columns  supporting  steel  roof 
trusses.  Used  in  part  as  a  general 
repair  shop  and  in  part  for  the  stor- 
age of  cars,  cost  per  cubic  foot  5.6 
cents. 

Boston  Rd.,  175th  St.,  &  So. 
Boul'd.     Part  B. 

Real  estate   for  Part    B   included  in 

Part  A. 
A    one-story    brick    sub-station    with 

steel   roof    trusses,    cost   per   cubic 

foot  15  cents. 

Boston  Rd.,  175th  St.  &  So. 
Boul'd.     Part  C. 

Real   estate   for  Part   C   included   in 

Part  A. 
A    one-story    brick    and    wood    office 

building,   cost  per  cubic   foot  20.3 

cents. 


Union 


Union 


10,768 


Union 


Union 


31,320 


60.544 


56,130 


813,400 


700.000 


49,062        911,350 


Union 


Union 


184,000 


18,360 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     231 


Area  of  real      Contents  of 
Ov\-aership  estate  in     ■      buildings 

square  feet     in  cubic  feet 


E.  17oth  St.  &  Boston  Road.  . 

A  part  two-  and  part  one-story  and 
cellar  brick  and  steel  car  barn  and 
offices.  This  is  the  main  car  barn 
of  the  Union  Railway  Company. 
The  entire  second  story  of  the  fagade 
on  Boston  Road  is  used  for  office 
purposes.  The  cellar  in  the  one- 
story  portion  is  used  as  the  machine 
and  repair  shop,  cost  per  cubic  foot 
10.2  cents. 

E.  190th  St.  &  Harlem  River. 

A  one-story  brick  and  steel  fireproof 
building  built  entirely  on  piles. 
This  building  is  used  as  a  cable 
anchorage  and  is  directly  on  the 
opposite  bank  of  the  Harlem  River, 
from  the  main  power-house  of  the 
Third  Avenue  Railroad  Company, 
cost  per  cubic  foot  47.5  cents. 

E.S.  3rd  Ave.,  bet.  128th-129th 

Sts. 

A  one-story  steel  frame  corrugated  iron 
buOding,  with  interior  finish  of 
wood  used  as  a  waiting  room  for  the 
Union  Railway  Company.  Situate 
on  City  Street,  cost  per  cubic  foot 
25.6  cents. 

E.  S.  Brook  Ave.  near  165th 

Street. 

A  one-story  and  cellar  brick,  stone  and 
steel  fireproof  sub-station.  This 
building  has  just  been  completed. 
It  is  built  to  replace  the  sub-station 
at  175th  Street  and  Southern  Boule- 
vard, cost  per  cubic  foot  13.3  cents 

3rd  Ave.  &  E.  138th  St 

A  one-story  wooden  frame  and  metal 
sheet  and  wood  finish  interior  wait- 
ing room,  situate  on  City  Street,  cost 
per  cubic  foot  26.3  cents. 

155th  St.  &  8th  Ave 

A  one-story  wooden  frame  metal,  sheet 
and  wood  finish  interior  waiting 
room,  situate  on  City  Street,  cost 
per  cubic  foot  26.3  cents. 


4,462 


264,500 


4,612 


4,612 


232 


VALUATION  OF  PUBLIC  UTILITIES 


Area  of  real 

Contents  of 

Ownership 

estate  in 

buildings 

square  feet 

in  cubic  feet 

E.  S.  3rd  Ave.  bet.  128th-129th 

Union 

None 

640 

Sts. 

A    one-story    wood    frame    building 

sheathed  inside  and  panelled  with 

tin  shingles.      Used  as    a    waiting 

room,  situate  on  City  Street,  cost  per 

cubic  foot  31  cents. 

Wolfs  Lane&  Old  Boston  Rd. 

Union 

234,000 

No  building. 

Main  St.  &  Buena  Vista  Ave. 

Yonkers 

26,865 

1,500,000 

A  three-story  brick  and  steel  fireproof 

car  barn,  and  sub-station,  used  in 

part    as    offices,    repair    shops,    car 

storage    and    sub-station    purposes. 

This  is   the   main   building   of   the 

Yonkers    Railroad    Company,    cost 

per  cubic  foot  19.5  cents. 

Webster  Ave.  (Bronx  R.  Rd.) . 

Yonkers 

67,000 

1,403,000 

A    one-story    brick    with    wood    roof 

trusses,  and  wood  floor  construction. 

used  as  a  car  storage  and  repair  shop, 

cost  per  cubic  foot  6.8  cents. 

Columbus  &  So.  Fulton  Aves .  . 

West- 
chester 

53,820 

1,560,780 

A  one-story  brick  with  steel  truss  and 

wood  floor  car  barn,  used  as  a  car 

storage   and  repair  shop,   cost   per 

cubic  foot  8.3  cents. 

Washington    Avenue,    1st    to 
Webster  Ave. 

West- 

19,995 

chester 

No  building. 

6th  St.,  So.  5th — So.  4th  Ave. 

West- 
chester 

28,085 

No  building. 

N.  3rd  Ave.  near  Sindey  Ave.  . 

West- 
chester 

None 

213,220 

No  real  estate.     A  one-story  brick  and 

steel  fireproof  sub-station.     This  is 

the  only  sub-station  of  the  West- 

chester Railroad  Company,  cost  per 

cubic  foot  22.5  centa. 

I 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    233 
Average  price  per  cubic  foot. 
For  all  buildings 12. 75  cents. 

Miscellaneous  vaults  in   Streets  (exclusive 

of  vaults  adjacent  to  and  included  in 

buildings)    at   Bowery   and   Chatham 

Square,  3rd  Avenue,  N.  of  6th  Street, 

3rd  Avenue,  between  66th  and  67th 

Streets,  3rd  Avenue  at  125th  Street, 

3rd  Avenue,  130th  Street  and  12.5th 

Street  at  Manhattan  Street. 
These  vaults  were  originally  used  as  cable 

wheel    vaults,    now    used   for   feeder 

man-holes. 

Total  value $120,655. 


SUMMARY  OF   UNITS 

USED  IN  ASCERTAINING  REPRODUCTION  COST  OF  TRACKS  OF  ThIRD  AvENUE, 

42nd  Street,  Dry  Dock  and  Kingsbridge  Railroads  briefly  styled 
AS  "Manhattan  Companies" 

(Length  in  Feet  of  Single  Track) 

Third  Avenue  R.  R. 
Conduit  Construction: 

Park  Row,  Bowery,  3rd  Ave.,  to  130th  St 82,962.3     feet 

Siding  3rd  Ave.,  130th  St.,  129th  St.,  66th  St 2,196.9       " 

125th  St.,  Manhattan  St 21,824.0       " 

Sidings,  12th  Ave.,  8th  Ave 832.0       " 

Amsterdam  Ave.,  Fort  George  loop 39,104.6 


146,919.8       "    or 
27 .  88     miles 


(Xot    including    Amsterdam    Ave.,    125th    St.    to 

Manhattan  St.) 

The  unit  price  per  lineal  foot  of  straight  track 
averaged  §11.88  and  varied  from  S9.40  for  the  Love 
Type  of  construction  to  §12.44  for  Duplex  con- 
struction, depending  on  the  type  of  construction 
and  the  character  of  paving. 

Horse  Car  Tracks: 

125th  St.,  end  of  Hne  to  conduit  construction 300         feet 

Siding  near  3rd  Ave 116 . 8 


416.8       "    or 
.  08     miles 


Value $1,113.00 


234  VALUATION  OF  PUBLIC  UTILITIES 

KiNGSBRIDGE   R.   R. 

Conduit  Construction: 

St.  Nicholas  Ave.,  Broadway 35,251 . 0    feet 


35,251.0       "    or 
6 .  65     miles 


The  unit  price  for  this  type  of  construction  is 
$11.18  per  lineal  foot. 

Horse  Car  Tracks: 

Siding  in  218th  St 652         feet 

Additional 1,268  "    or 


1,920  "    or 

0.37     miles 


Value .$5,000.00 

42nd  Street,  M.  &  St.  N.  Ave.  R.  R. 
Conduit  Construction: 

First  Ave.,  34th  to  42nd  St 4,200         feet 

42nd  St.,  end  to  end 20,932.8       " 

Seventh  Ave.,  42nd  to  45th  St 1,425 . 0       " 

Broadway,  45th  to  Manhattan  St 45,885 . 5 

Tenth  Ave.,  42nd  to  72nd  St 15,377 . 7 


87,821.0       "    or 
16.61     miles 


The  unit  price  per  lineal  foot  of  straight  track 
averaged  .$11.20  and  varied  from  S7.45  to  $13.67  for 
Duplex  construction,  depending  on  the  type  of  con- 
struction and  character  of  paving. 

Horse  Car  Tracks: 

Siding,  125th  St 

109th  St.,  Pleasant  Ave.  to  end  of  Une 

Pleasant  Ave.,  109th  to  110th  St 

St.  Nicholas  Ave.,  110th  St.,  E.  River  to  125th  St.  . 

12th  Ave.,  north  from  34th  St 

86th  St.,  Amsterdam  Ave.  to  end  of  line 3,091 .6 


The  unit  price  per  lineal  foot  of  straight  track 
averaged  S2.42  and  varied  from  $1.52  to  S3. 11, 
depending  on  the  type  of  construction  and  character 
of  paving. 


208.5 

feet 

630.0 

280.0 

20,511.6 

300.0 

3,091.6 

25,021.7 

"    or 

4.73 

miles 

APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     235 

Dry  Dock,  East  Broadway  &  Battery  R.R. 
Conduit  Construction: 
^     Grand  St.,  Vestry  St.,  East  River  to  Greenw-ich  St.  20,129.1     feet 

Vestry,  Desbrosses,  Greenwich  to  N.  River 1,312.9 

Monroe,  Corlears  Sts 587 . 2 

Essex  St.,  Ave.  A,  Grand  to  2nd  St 2,476.0 

Clinton  St.,  Grand  to  2nd 2,306.2 

Greenwich  St.,  Beach  to  Cortlandt 3,621 . 1 

(Not  including  Greenwich,  Canal  to  Beach.) 

Washington  St.,  N.  Moore  to  Cortlandt 3,280.6 

(Not  including  Washington,  Canal  to  N.  Moore.) 

Cortlandt,  Greenwich  to  end  of  line 720.8 

2nd  St.,  Ave.  A  to  Ave.  B 736.5       " 

34th  St.,  River  to  First  Ave 600.0 

(Not  including  10th  St.  from  Ave.  B  to  Ave. 
D,  not  11th  St.,  from  Ave.  C  to  Ave.  D,  nor 
Goerick  from  Grand  to  E.  Houston,  nor  E.  Hous- 
ton from  Goerick  to  Ave.  D,  nor  Fulton,  B'way 
to  Washington.) 

Ave.  B  near  14th  St 378.6       " 

1st  Ave.,  34th  St.  to  end  of  conduit 159 . 3 

Canal  St.,  Center  St.,  to  W.  H.  L.,  B'way 1,545.0       " 

Park  Row,  Post  Office  loop  to  Center  St 754 . 8       " 


38,493.2       "    or 
7.31     miles 
The  unit   price  per  lineal  foot  of  single  track 
averaged  $8.70  and   varied  from  $4.75  to  S9.66, 
depending  on  the  type  of  construction  and  charac- 
ter of  paving. 
Horse  Car  Tracks: 

East  B'way,  Grand  to  James  St 9,136.0     feet 

Grand  St 162.5       " 

Canal  St.,  E.  B'way  to  center 6,590.6       " 

Walker  &  N.  Moore,  Mulberry  to  Washington 3,747. 1 

Lispenard  and  Beach,  B'way  to  Hudson 2,388.6     feet 

Columbia  St.  and  Ave.  D.,  Grand  St.  to  14th  St. . .  6,692.9 

Lewis  St.,  Grand  to  8th  St 3,663 . 7       " 

8th  St.,  Lews  St.  to  Ave.  D 293 . 2       " 

Vestry  St.,  Greenwich  St.  to  end  of  line 732.3 

14th  St.,  Ave.  D  to  Ave.  B 2,807.6       " 

1st  Ave.,  30th  to  34th  Sts.,  14th  to  23rd 4,058 . 8 

Ave.  A.,  23rd  to  24th  St 555.4       " 

Clinton  St.,  E.  B'way  to  end  of  line 650.0 

Essex  St.,  E.  B'way  to  Grand  St 1,067 . 6 

Ave.  B,  2nd  St.  to  14th  St 6,197.4       " 


48,743.7   •     "     or 
9 .  23       miles 


236  VALUATION  OF  PUBLIC  UTILITIES 

The  unit  price  per  lineal  foot  of  straight  track 
averaged  $2.30  and  varied  from  $1.46  to  $3.20, 
depending  on  the  type  of  construction  and  char-  » 

acter  of  paving. 

In  Car  Barns: 

Conduit    and    Horse    Tracks,    "Manhattan    Com- 
panies"     43,434     feet        or 

8.20        miles 

Value $111,753 

Special  Work: 

The  distances  given  for  the  straight  track  lengths 
include  the  lengths  of  special  work  pieces,  meas- 
ured to  tangent  intersections.  The  value  of  each 
special  work  piece,  including  plain  curves,  cross- 
overs, etc.,  was  determined  separately  and  should 
be  added  to  the  values  for  straight  track  as  deter- 
mined by  the  unit  prices. 

Third  Ave.  Special  Work,  Value $503,800 

Dry  Dock  Special  Work,  Value 232,101 

42nd  Street  Special  Work,  Value 278,000 

Kingsbridge  Special  Work,  Value 25,466 

Rent  of  Store  Yards,  additional  handling,  etc.,  in 

Manhattan,  Value $116,600 


I 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    237 
SUMMARY  OF  UNITS 

USED  IN  ASCERTAINING  REPRODUCTION  COST  OF  TROLLEY  TRACKS  OF  UnION, 

Bronx  Traction,  Southern  Boulevard,  Yonkers  and  Westches- 
ter Companies 

(Length  in  Feet  of  Single  Track) 
Union  Railway: 

3rd  Ave.,  128th  St.,  Webster  Ave 50,923 . 5     feet 

Walker   Ave.,  E.  Bronx  St.,  Boston  Rd 1,261 .0       " 

Boston  Rd.,  3rd  Ave.,  near  Scis.X-over 21,413 . 5       " 

Fordham  Rd.,  Webster  Ave.,  230th  St 48,626 . 0       " 

Gun  Hill  Rd.,  W.  P.  Rd.,  Webster  Ave 2,790.6       " 

Tremont  Ave.,  Boston  Rd.,  Sedgwick  Ave 26,340.8 

Webster  Ave.,  133rd  St.,  City  Hne 79,049.2 

Sedgwick  Ave.,  Jerome  Ave.  to  Tremont 21,143.9       " 

W.  P.  Rd.,  Allerton  Ave.,  233rd  St 21,454.8       " 

Jerome  Ave.,  Macomb's  Br.,  City  line 67,642.0       " 

161st  St.,  3rd  Ave.  to  Jerome  Ave 12,285 . 7 

Boscobel,  Jerome  Ave.  to  Aqueduct 6,430. 1       " 

Locust  Ave.,  134th  St.,  138th  St 1,042.3 

138th  St.,  east  of  Locust  Ave.  to  Bridge  approach.  ..  .  16,638.4       " 

Lincoln  Ave.,  133rd  St.,  161st  St 14,497 . 0       " 

Westchester  Ave.,  3rd  Ave.,  Div.  with  Bronx  Traction 

Company 20,935 . 3       " 

135th  St.,  Madison  to  8th  Ave 6,573.3 

155th  St.,  Macomb's  PL,  8th  Ave 1,582 . 2       " 

Macomb's  Bridge,  154th  St.,  Jerome  Ave 3,220.6       " 

136th  St.,  Lincoln  to  3rd  Ave    408 . 9 

133rd  St.,  Lincoln  to  3rd  Ave 626 . 1 

Lexington  Ave.,  Harlem  Bridge 880.0       " 

Pelham  Ave.,  3rd  Ave.,  So.  Boulevard 6,017.5 

St.  Ann's  Avenue 15,019.2       " 

446,801.9       "    or 
84.60     miles 
The  unit  price  per  lineal  foot  of  straight  track  aver- 
aged $3.00  and  varied  from  S2.46  to  $3.23. 
Bronx  Traction  Company: 

Westchester  Ave.  Div.  with  LTnion  Ry.  Co.,  Walker 

Ave 25,688. 1     feet 

W.  P.  Rd.,  Morris  Park  Ave.,  Allerton  Ave 15,359 .6 

Morris  Park  Ave.,  Walker  Ave.,  W.  P.  Rd 9,532 . 5       " 

Classon  Pt.  Ave.,  end  of  line.  West  Ave 23,858 . 6 

Walker  Ave.  Fort  Schy.  Rd.,  E.  Bronx  St 20,476.9 

Fort  Schy.  Rd.,  E.  Boul.,  end  of  Hne 5,520.5       " 

Bear  Swamp  Road 3,885.0       " 

104,321.2       "    or 
19 .  80     miles 
The   unit  price  per  lineal  foot  of  straight  track 
averaged  $2.72  and  varied  from  $2.46  to  $3.23. 


238  VALUATION  OF  PUBLIC  UTILITIES 

Southern  Boulevard  R.  R.: 

So.  Boulevard,  Lincoln  Ave.,  Boston  Rd 40,295.2     feet 

So.  Boulevard,  Lincoln  Ave.,  S.  of  Alexander  Ave.  . .        1,238.4       " 
So.  Boulevard,  S.  of  Alexander  Ave.,  N.  of  Willis   .  .        1,558.8 

So.  Boulevard,  N.  of  Willis,  N.  of  138th  St 7,920.0 

So.  Boulevard,  N.  of  138th  St.,  N.  of  141st  St 2,580.0       " 

So.  Boulevard,  N.  of  141st  St.,  S.  of  St.  Mary's  PI.  .  .        1,041.2       " 

So.  Boulevard,  S.  of  St.  Mary's  PL,  S.  of  Jennings 21,598 . 6 

So.  Boulevard,  S.  of  Jennings  St.,  S.  of  Boston  Rd.  ..       4,041.4       " 
So.  Boulevard,  S.  of  Boston  Rd.,  S.  of  Boston  Rd. . .  316.8 

40,295.2       ~'    or 

The  unit   price  per  lineal  foot   of  straight  track  7.64     miles 

averaged  .S2.82  and  varied  from  $2.46  to  .$3.23. 
In  Car  Barns: 

Union  ^ 

Bronx  Traction  \ 8,893 . 9     feet  or 

Southern  Boulevard  J  1 .  70     miles 

Value $12,538 

Special  Work: 

Value $363,020 

YoNKERs  R.R. : 
Warburton  Ave., 

Main  St.,  Yonkers,  Main  St.,  Hastings 30,398.0     feet 

Riverdale  Ave., 

Main  St.,  South  City  line 8,640.0 

Main  St., 

Terminal  Getty  Square 3,296.0 

Palisade  Ave., 

Getty  Sq.,  Roberts  Ave 12,558.0 

Elm  St., 

Palisade  Ave.,  Nepperhan 720. 0       " 

South  Broadway, 

Getty  Sq.,  So.  City  line,  Yonkers 16,950.0 

New  Main  St., 

Getty  Sq.,  South  Broadway 5,108.0       " 

Nepperhan  Ave., 

New  Main  St.,  Bronx  River 25,982.0 

Yonkers  Ave., 

Nepperhan  Ave.,  East  City  Hne,  Yonkers 22,007.0       " 

McLean  Ave., 

So.  Broadway,  Bronx  River  Rd 30,728 .0 

Bronx  River  Rd., 

McLean  Ave.,  Yonkers  Ave 11,618 . 0       " 

Elm  &  Walnut  Sts., 

Nepperhan  Ave.,  Lake  Ave 6,947.0       " 

Central  Ave., 

Yonkers  Ave.,  South  City  line 15,200 . 0 

190,152.0       ^    or 
The  unit  price  per  lineal  foot  of  straight  track  36.00     miles 

averaged  $2.90  and  varied  from  .$2.46  to  $3.23. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    239 

In  Car  Barns: 

Total  Feet 8,448.0  or 

1 .  60     miles 

Value $19,2(i5 

Special  Work: 

Value $163,456 

Westchester  Electric  R.R.  : 
New  York  City, 

White  Plains  Road,  Town  Dock 17,805 . 0     feet 

Mt.  Vernon  City, 

W.  Lincoln  Ave.,  East  line,  City 67,843 . 0 

Bronxville, 

Poplar  St.,  Bronxville,  North  line 5,130.0 

Village,  Tuckahoe, 

N.  Bronx  line,  Bronx  River 5,380.0 

Town  of  Eastchester, 

Midland  Ave.,  East  Town  line 17,790.0 

Village,  North  Pelham, 

4th  St.,  AV.  Hne,  North  line 6,505 . 0 

Village  of  Pelham, 

3rd  St.,  East  Hne 17,910.0 

New  Rochelle  City, 

Within  City  hmits 62,710.0 

Town  of  Mamaroneck, 

Boston  Rd.,  Invermere 1,300.0 


202,374.0 

38 .  30     miles 
The  unit  price  per  lineal  foot  of  straight  track 
averaged  $3.28  and  varied  from  $2.46  to  .$3.23. 
In  Car  Barns: 

Total  Feet      4,960  or 

0.90     miles 

Value $10,413 

Special  Work: 

Value $128,878 


240 


VALUATION  OF  PUBLIC  UTILITIES 


Grand  totals 


Conduit 


Horse 


Feet 


Miles 


Feet 


Miles 


TroUey 


Feet 


Miles 


ThirdAvenue 146,919.8  27.88         416.8  t  0.08 

42ndSt 87,821. Ol  16.61  25,021.7  4.73 

Dry  Dock 38,493.2  1  7.31  48,743.7  9.23 

Kingsbridge 35,251.0  6.65  1,920.0  0.37 

Car  Barns  in  above 25,122. 0|  4.74  18,311.9  3.46 

Union 


Bronx  Traction 

Southern  Boulevard. 
Car  Barns  in  above. . 
Yonkers 


Westchester 

Car  Barns  in  above I 

Total  in  feet 1333,607 

Total  in  mUes 63.19 

Grand  total 1,434,267.3  Feet  or  271 .6  Miles. 


94,414.10 


446,801. 

104,321. 

40,295. 

8,893. 

190,152. 

202,374. 

13,408. 

1,006,246, 


17.87 


84.60 

19.80 

7.64 

1.70 

36.00 

38.30 

2.50 

190.54 


SUMMARY  OF   UNITS 

used  in  ascertaining  reproduction  cost  of  paving  for  tracks  of 
Third  Avenue,  42nd  Street,  Dry  Dock  and  Kingsbridge  Rail- 
roads  BRIEFLY  styled  AS  "  MANHATTAN  COMPANIES" 

Price  per 
sq.  yd. 

Granite  on  Concrete $3 .  63 

Granite  on  Sand  Conduit  Track 2 .  97 

Granite  on  Sand 2.15 

Asphalt  on  Concrete 2 .  75 

Asphalt  on  Stone 1-93 

Asphalt  on  Macadam 1-87 

Wood  Block  on  Concrete 4.07 

Asphalt  Block  on  Concrete 3 .  03 

Belgian  Block  on  Sand 1-49 

Trap  or  Cobble  on  Sand 39 

Macadam  on  Telford 1 .  38 

Macadam  on  Earth 82 


The  above  values  for  paving  are  based  on  cost,  without  maintenance 
charge.  ^^Tiere  tracks  are  laid  ten  feet,  one-half  inch,  standard  centers, 
two  feet  are  allowed  for  paving  outside  of  track,  and  five  feet  between  the 
up  and  down  track. 

Lengths  used  are  those  given  for  total  measurements  under  "tracks," 
without  deduction.  Prices  include  paving  base  where  used,  unless  concrete 
is  required  for  track. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     241 

SUMMARY  OF   UNITS 

used  in  ascertaining  reproduction  cost  of  paving  for  tracks  of 

Union,  Bronx  Traction  and  Southern  Boulevard  Railroads 

Price  per 
sq.  yd. 

Granite  on  Concrete $3 .  30 

Granite  on  Sand 2.15 

Asphalt  on  Concrete 2  .  42 

Asphalt  on  Stone 1 .  93 

Asphalt  Block  on  Concrete 2 .  70 

Wood  Block  on  Concrete 3 .  74 

Slag  Brick  on  Concrete 3.41 

Brick  on  Concrete 2.75 

Macadam  on  Telford 1 .  38 

Macadam  on  Earth 83 

Trap  or  Colable 39 

Earth 28 

Cinders -44 

Plank  flooring 1 .  58 

The  above  values  for  pa\dng  are  based  on  cost,  ^\■ithout  maintenance 
charge.  Where  tracks  are  laid  ten  feet,  one-half  inch,  standard  centers, 
two  feet  are  allowed  for  pa\ang  outside  of  track,  and  five  feet  between  the 
up  and  down  track. 

Lengths  used  are  those  given  for  total  measurements  under  "track" 
without  deduction.     Prices  include  paving  base  where  used. 
SUMMARY  OF  UNITS 

USED   IN    ascertaining    REPRODUCTION    COST    OF    PAVING    FOR    TRACKS    OF 
YONKERS  AND  WeSTCHESTER  RaILROADS 

Price  per 
sq.  yd. 

Granite  on  Concrete S3 .  30 

Granite  on  Sand 2.15 

Asphalt  on  Concrete 3 .  08 

Asphalt  on  Stone 2 .  75 

Asphalt  Block  on  Concrete 2 .  70 

Wood  Block  on  Concrete 3 .  74 

Slag  Brick  on  Concrete 3.41 

Brick  on  Concrete 3 .  25 

Macadam  on  Telford 1-54 

Macadam  on  Earth 99 

Trap  or  Cobble 39 

Earth 28 

Cinders 44 

The  above  values  for  paving  are  based  on  cost,  -n-ithout  maintenance 
charge.  TVTiere  tracks  are  laid  ten  feet,  one-half  inch,  standard  centers,  two 
feet  are  allowed  for  paving  outside  of  track,  and  five  feet  between  the  up  and 
down  track. 

Lengths  used  are  those  given  for  total  measurements  under  "track," 
without  deduction.     Prices  include  paving  base  wheie  used. 
16 


242  VALUATION  OF  PUBLIC  UTILITIES 

SUMMARY  OF  UNITS 

USED    IN    ASCERTAINING    REPRODUCTION   COST   OF  HIGH    AND    LOW    TENSION 

CABLES  OF  Third  Avenue,  42nd  Street,  Dry  Dock,  Kingsbridge, 
Union  Bronx  Traction,  Southern  Boulevard,  Yonkers  and 
Westchester  Railroads 

No.  4/0  high-tension,  3-conductor,  lead-covered, 

Third  Avenue  R.  R 410,282  ft. 

Union  R.  R 233,213  " 

Yonkers  R.  R 45,561  " 

Westchester  R.  R 11,764  " 


Total 700,820  " 

700,820  ft.  @  SI. 31  per  lineal  foot. 

No.  4/0   high-tension,    3-conductor,    leaded    &   armored    (sub- 
marine), 

Union  R.  R 6,250  ft. 

6,250  feet  @  $2.00  per  hneal  foot. 

No.  500,000  c.  m.,  low-tension,  single-conductor,  lead-covered. 

Third  Ave.  R.  R 3,234  ft. 

42nd  Street  R.  R 57,157  " 

Dry  Dock  R.  R 29,404  " 

Ivingsbridge  R.  R 34,596  " 


Total 124,401  " 

124,401  feet  @  S0.70  per  lineal  foot. 

No.  1,000,000  c.  m.,  low-tension,  single-conductor,  lead-covered. 

Third  Ave.  R.  R 402,596  ft. 

42nd  Street  R.  R 206,194  " 

Drv  Dock  R.  R 44,401  " 

Kingsbridge  R.  R 86,040  " 

Union  R.  R 117,433  " 


Total 856,664  " 

856,664  feet  @  SI. 16  per  lineal  foot. 

No.  1,000,000  c.  m.  (Bare)  ground  return, 

Union  R.  R 3,200.  ft. 

3,200  feet  @  $0.72  per  Hneal  foot. 

No.  2,000,000  c.  m.  (Bare)  ground  return, 

Union  R.  R 30,076  ft. 

30,076  feet  @  $1.44  per  Hneal  foot. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    243 
SUMMARY  OF  UNITS 

USED  IN  ASCERTAINING  REPRODUCTION  COST  OF  CONDUCTOR  BARS  AND 
BONDS,  EQUALIZERS,  TAPS,   ETC.  OF  ThIRD  AvENUE,  42nD   StREET,   DrY 

Dock,  Kingsbridge,  Union,  Bronx   Traction,  Southern    Boule- 
vard, YoNKERS  and  Westchester  Railroads 

Conductor  Bars: 

Manhattan  Companies $350,117 

Bonds: 

Bronx  Companies 83,851 

Yonkers  &  Westchester  Cos 46,200 

Equalizers,  Taps,  Etc.: 

Manhattan  Companies 22,158 

Bronx  Companies 1,794 

SUMMARY  OF  UNITS 

used  in  ascertaining  reproduction  cost  of  overhead  trolley  con- 
struction of  Union,  Bronx  Traction,  Southern  Boulevard, 
Yonkers  and  Westchester 

Union  Railway  Company 
Cost    of   overhead    construction,    including   tangent    and 

special  work $3,230  per  mile 

Bronx  Traction  Company 
Cost    of    overhead    construction,    including    tangent    and 

special  work 2,140 

Southern  Boulevard  Company 
Cost    of    overhead    construction,    including    tangent    and 

special  work 3,910 

Yonkers  R.\ilroad 
Cost    of    overhead    construction,    including    tangent    and 

special  work 2,580 

Westchester  Railroad 
Cost    of    overhead    construction,    including    tangent    and 

special  work 3,670 

SUMMARY  OF  UNITS 

USED   IN   ascertaining   REPRODUCTION   COST   OF   TROLLEY   WIRES   OF   UnION, 

Bronx  Traction,  Southern  Boulevard,  Yonkers  &  Westchester 

Union    Railway   Company 

Price  per  ft. 

Tangent  and  special  work 439,471  ft.  at  8-2/100 

Bronx  Traction  Company 

Tangent  and  special  work 103,578  ft.  at  8-2/100 

Southern  Boulevard  Company 

Tangent  and  special  work 41.903  ft.  at  8-2/100 

Yonkers  Railroad  Company 

Tangent  and  special  work 208,664  ft.  at  8-2/100 

Westchester  Railroad  Company 
Tangent  and  special  work 208,027  ft.  at  8-2/100 


244  VALUATION  OF  PUBLIC  UTILITIES 

SUMMARY  OF  UNITS 

USED  IN  ASCERTAINING  REPRODUCTION  COST  OF  FEEDERS  OF  UnION,   BrONX 

Traction,  Southern  Boulevard,  Yonkers  and  Westchester 

Union  Railway  Company 

Price  per  ft. 

600,000  C.  M.  weather  proof 419,922  ft.  at  S   .40 

4/0  weather  proof 11,700  "    "       .  18 

500,000  C.  M.  paper  &  lead  armored 1,365  "    "       .86 

1,000,000  C.  M.  paper  &  lead  armored 4,000  "    "    1 .  36 

1/0  paper  &  lead  armored 3,675  "    "       .33 

Bronx  Traction  Company 

500,000  weather  proof 52,141   "  "  .40 

4/0  weather  proof 15,041  "  "  .18 

1,000,000  C.  M.  paper  &  lead  armored 433  "  "  1 .36 

Southern  BauLEVARD  Company 

500,000  C.  M.  weather  proof 15,546"    "       .40 

4/0  weather  proof 33,738"    "       .18 

Yonkers  Railroad  Company 

500,000  C.  M.  weather  proof 171,339  "    "       .40 

4/0  &  1,000,000  C.  M.  bare  ground  return,  value 

S8,588 
500,000  C.  M.  bare  ground  return,  value 84,364 

Westchester  Railro.\d  Company 

1,000,000  C.  M.  paper  &  lead 159,200  "    "       .40 

4/0  weather  proof 9,949  "    "       .  18 

SUMxMARY  OF  UNITS 

used  in  ascertaining  reproduction  cost  OF  ducts  of  Third  Avenue, 
42nd  Street,  Dry  Dock  &  Kingsbridge  Railroads,  Union,  Bronx 
Tr.\ction,  Southern  Boulevard,  Yonkers  and  Westchester 

"  Manhattan  Companies  ' ' 

Total  length  of  trenches 266,505  ft. 

At  an  average  price  per  trench  foot  of S4 .  80 

808  Manholes  at S280. 00 

Union  Railway  Company 

Total  length  of  trenches 60,327  ft. 

At  an  average  price  per  trench  foot  of S3 .  60 

179  Manholes  at S197.00 

Yonkers  and  Westchester  Companies 

Total  length  of  trenches 35,347  ft. 

At  an  average  price  per  trench  foot  of S3. 15 

115  Manholes  at 8149.25 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    245 

SUMMARY  OF  UNITS 

used  in  ascertaining  reproduction  cost  of  station  apparatus  of 
Third  Avenue,  42nd  Street,  Dry  Dock  and  Iungsbridge  Rail- 
roads BRIEFLY  styled  AS  "MANHATTAN  COMPANIES" 


Third 
Ave. 


Union 


Yonkers  & 
Westchester 


Price 


KiNGSBRIDGE    STATION.' 

Vertical  Engines,  5,000  H.  P., 
cross-compound,  direct-con- 
nected to  alternating  current 
generators 

Price  per  Unit 

Exciter  Compound  Engines,  250 
H.  P.,  direct-connected  to  direct- 
current  generators 

Price  per  Unit 

S-witching  Apparatus,  Wiring,  etc.. 
Value 

Water  Tube  Boilers  with  Auto- 
matic Stokers,  520  H.  P 

Price  per  Unit 

Condensers,  Economizers,  Feed 
Water  Heaters,  Pumps,  Coal  and 
Ash  Conveying  Machinery,  Pip- 
ing, S-n-itchboards,  Station 
Wiring,  etc..  Generating  Station 

Value 

Substations: 

Rotary  Converters,  500  K.   W. ... 

Price  per  Unit 

Rotary  Converters,  1,000  K.  W.. 

Price  per  Unit 

Rotary  Converters,  1,500  K.  W.  . 

Price  per  Unit 

Motor  Generators 

Value 

Transformers,  175K.W.,  6,000,  350 
volts,  oil,  self-cooling 

Price  per  Unit 

Transformers,  375  K.W.,  6,000,  350 
volts,  oil,  self-cooling 

Price  per  Unit 

Transformers,  500  K. W.,  6,000,  350 
volts,  air  blast 

Price  per  Unit 


30 


11 


35 


12 


18 


12 


$133,100 

.17,040 
$111,995 

$10,308 


$520,690 

$7,150 

$12,000 
$16,790 
$20,670 

$1,170 

$1,960 

$2,080 


246 


VALUATION  OF  PUBLIC  UTILITIES 


Summary  of  Station  Apparatus  {continued) : 


Third 
Ave. 


Union 


Yonkers  & 

Westchester 


Price 


Transformers,  30  K.  W.,  6,000,350 
volts,  oil,  self-cooling 3 

Price  per  Unit j .  .  .  . 

Storage  Battery  Complete,  276 
cell 3 

Price  per  Unit 

High  and  Low  Tension  Switch- 
boards, Wiring,  and  Auxiliary 
Apparatus,  for  Sub-stations  .  .  . ;       3 

65th  St.  and  Third  Ave i  Value, 

129th  St.  and  Amsterdam  Ave 

Bayard  Street 

West  Farms 

Brook  Ave 

Yonkers 

Westchester 


$330 


$91,300 


$36,000 
54,367 
40,723 
31,290 
31,750 
23,600 
24,380 


SUMMARY  OF  UNITS 

USED   IN   ASCERTAINING   REPRODUCTION   COST   OP   ROLLING   STOCK  OF   ThIRD 

Avenue.    42nd    Street,   Dry   Dock   and   &ngsbridge  Railroads, 

BRIEFLY   styled   AS   "MANHATTAN   COMPANIES" 

Passenger  and  Service  Bodies  or  Electrically  Equipped  Cars 

Unit  price 

No.        Type                                                        Builder  to  reproduce 
Owned  and  Operated  by  Manhattan  Companies 

82     12-Bench Brill                 at  $1,245 

93     S.  T.  C LaCl.               "  1,475 

16     D.  T.  C St.  L.               "  2,500 

61     D.  T.  C Brill                 "  1,675 

15     Conv "                   "  1,675 

75     D.  T.  C "                   "  1,800 

20     12-Bench "                   "  1,300 

150     P.  A.  Y.  E "                   "  2,000 

276             "          "                   "  2,200 

Leased  to  Yonkers  R.  R.  Co. 

10     D.  T.  C Brill                 at  1,675 

39     12-Bench "                   "  1,300 

Leased  to  Union  Ry.  Co. 

50     12-Bench Brill                 at  1,254 

100     D.  T.  C "                     "  1,675 

Leased  to  Westchester  Electric  Company 

50     12-Bench Brill                 at  1,254 

Service  Car  Bodies 
Sweepers,  Scrapers,  Miscellaneous, 

Value  $22,350 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    247 

Motors  of  Electrically  Equipped  Cars 
No. 


Unit  price 
Type  to  reproduce 

Owned  and  Operated  by  Manhattan  Companies 


210     General  Electric 210 

44  "  "        57 

4  "  "        1000 

38     Westinghouse 69 


at 


226 

86 

2 

552 
36 


68 
56 
49 
310 
56 


452     General  Electric 210 

Leased  to  Yonkers  R.  R.  Co. 

80     Westinghouse 56 

Leased  to  Union  Ry.  Co. 

44     Westinghouse 68 

256  "  56 

Leased  to  Westchester  Electric  Company 

2     General  Electric 57 

98     Westinghouse '.      56 


S650 
600 
425 
380 
410 
630 
400 
675 
630 
650 

630 

410 
630 

600 
630 


Trucks  of  Electrically  Equipped  Cars 

Unit  price 
No.  Type  Builder  to  reproduce 

Owned  and  Operated  by  Manhattan  Companies 

314     No.  22  E Brill  M.  T.      at  200 

2     M.  T .Standard  "  262 

32     Double Peckham  "  235 

100     Single "  "  250 

2         "      Brill  "  205 

1  "      Diamond  "  225 

850     No.  39  E Brill  M.  T.       "  ^325 

190     No.  22E "  "  "  '250 

Leased  to  Yonkers  R.  R.  Co. 

80     No.  22  E Brill  M.  T.       "  200 

Leased  to  Union  Ry.  Company 

300     No.  22  E Brill  M.  T.       at  200 

Leased  to  Westchester  Electric  Company 

100     No.  22  E Brill  M.  T.      at  200 

Horse  Cars  owned  by  Dry  Dock,  East  Broadway  &  Battery 
R.  R.  Co. 

27     Horse  Cars at  $1,200 

Plows,  Sweepers,  etc.     Value $5,200 

'  Price  includes  Steel  Wheels;  other  prices  Cast  Wheels. 


248  VALUATION  OF  PUBLIC  UTILITIES 

Summary  Miscellaneous  Car  Equipment 
"Manhattan  Companies" 

Unit  price  Total 

Article                                              new  No. 

Brakes,  SterUng  hand $15 .  00  1034 

Brakes,  Peacock  hand 15.00  1040 

Brakes,  West.  Air 320. 00  235 

Brakes,  Xat'I  Air 325.00  1 

Brakes,  Allis  Chalmers  Air 280.00  200 

Vestibules,  Portable 25.00  693 

Circuit  Breakers,  M.  Q 18.00  521 

Circuit  Breakers,  M.  R 20. 00  894 

Circuit  Breakers,  West 20.00  695 

Controllers,  K-7-C  or  K-7 122.60  3 

Controllers,  K-8-B  or  k-d 112.60  538 

Controllers,  K-9 99.60  198 

Controllers,  K-10 90.00  1 

Controllers,  K-27 117.60  1341 

Controllers,  K-29 176.30  32 

Controllers,  R-1 7 90.00  11 

Resistances,  West.  Short 9 .  00  439 

Resistances,  West.  Long 10. 00  205 

Resistances,  West.  3  Pt 35.00  849 

Resistances,  West.  Drum 8 .  00  66 

Resistances,  G.  E.  Grid 10.00  1600 

Wood  Sw-itches,  T.  H 8.50  4 

Hood  Switches,  M.  S 15.00  610 

Hood  Switches,  West 10.00  407 

Wheels,  per  pr.  steel  drivers,  no  axles 50 .  00  667 

Wheel  Guards,  H.  B 20. 00  958 

Registers,  Sterhng  Meaker,  No.  5 22 .  00  154 

Registers,  International 14.00  400 

Registers,  New  Haven 14 .  00  59 

Heaters — Set  of    4  complete 18.50  3 

Heaters— Set  of    6  complete 22 .  00  81 

Heaters— Set  of    8  complete 26.50  177 

Heaters— Set  of  12  complete 35. 50  9 

Heaters— Set  of  16  complete 43 .  50  635 

Headhghts 4.00  2078 

Trolley  Bases,  complete,  U.  S.  Xo.    6 18.00  10 

Trolley  Bases,  complete,  U.  S.  No.  11 18 .  00  90 

Trolley  Bases,  complete,  S.  M.  No.    4 15 .  00  135 

Lightning  Arresters,  G.  E.  M.  D 6 .  50  120 

Lightning  Arresters,  West.  M.  P 2 .  19  360 

Signs,  "Millan"  IH-pe,  Side 6.00  1476 

Signs,  "Millan"  Type,  End 9.00  1488 

Signs  "Millan"  Tj-pe,  Vestibule 1 .  15  717 

Plows ." 16.00  656 

Controller  handles  per  pr 1 .  50  598 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    249 

Summary  Miscellaneous  Cae  Equipment — (Continued): 

Unit  price  Total 

Article                                               new  No. 

Car  Wiring 1052 

Registers,  P.  A.  Y.  E.  Portable 28.00  425 

Signs,  "  Hunter,"  Side 12 .  50  550 

Signs,  "  Hunter,"  End 12 .  50  550 

Signs,  "  Hunter,"  Vestibule 12 .  50  550 

SUMMARY  OF  UNITS 

USED  IN  ASCERTAINING  REPRODUCTION   COST  OF  ROLLING   STOCK   OF  UnION, 

Bronx    Traction,    Southern    Boulevard,    Yonkers  and    West- 
chester Companies 

Passenger  Car  Bodies  of  Electrically  Equipped  Cars 

Unit  price 

Xo.                                         Type                       Builder  to  reproduce 
Owned  and  Operated  by  Union  Railway  Co 

113 D.T.C.                 ....  $  1,675 

64 S.  T.  C.                American  1,300 

9 S.  T.  C.                Laclede  1,500 

9 S.  T.  C.                Stephenson  1,600 

17 S.  T.  C.                St.  Louis  1,200 

10 S.  T.  C.                Gilbert  1,200 

27 S.  T.  C.                American  1,200 

29 D.T.  O.                14-B  1,374 

8 S.  T.  O.               American  8-B  1,000 

33 S.  T.  O.                Steph.  10-B  1.025 

107 S.  T.  O.                Bril  1,025 

Leased  to  Yonkers  R.  R.  Co. 

6 D.T.C.               ....  .?1,675 

25 S.  Conv.                ....  2,350 

21 D.  T.  O.               14-B  1,374 

4 S.  T.  O.                Steph.  10-B  1,025 

3 S.  T.  C.                Laclede  1,475 

5 S.  T.  C.                American  1,500 

Leased  to  Tarrytown  W.  P.  &  M.  Railway  Company 

3 S.  T.  O.               Steph.  10-B  $1,025 

6 D.T.C.                ....  1,675 

7 S.  T.  C.                American  1,300 

11 :....      S.  T.  C.                Steph.         .  1,600 

4 S.  T.  C.                American  1,300 

3 P.  A.  Y.  E.         Brill  2,200 

Leased  to  Westchester  Electric  Company 

25 S.  T.  C.                American  $1,300 

Owned  and  Operated  by  Yonkers  Co. 

15 D.  T.  B.              St.  Louis  $2,500 

7 S.  T.  B.               St.  Louis  1,200 

Owned  and  Operated  by  Westchester  Electric  Co. 

20 D.T.C.               Brill  2,500 


250  VALUATION  OF  PUBLIC  UTILITIES 

Service  Bodies  of  Electrically  Equipped  Cars 
OwTied  and  Operated  by  Union  Railway  Co. 

Sweepers,  sand  cars,  etc 32 

Value $38,756.00 

Leased  to  Yonkers  R.  R.  Co. 

Sweepers,  sand  cars,  etc 7 

Value $6,725.00 

Leased  to  Tarrytown  W.  P.  &  M.  Railway  Co. 

Sweepers,  sand  cars,  etc 11 

Value $6,100.00 

Leased  to  Westchester  Electric  Co. 

Sweepers,  sand  cars,  etc 7 

Value $5,450.00 

Owned  and  Operated  by  Yonkers  Company 

Sweepers,  sprinklers,  etc 4 

Value $4,880.00 

Motors  of  Electrically  Equipped  Cars 

Unit  price 

No.         Type  to  reproduce 

Owned  and  Operated  by  Union  Railway  Company 

140     G.  E.  57 $600 

5     G.  E.  52 375 

30     G.  E.  800 375 

280     G.  E.  1000 425 

2     West.  69 380 

303     West.  68 410 

170     West.  56 630 

151     West.  49 400 

Leased  to  Westchester  Electric  Company 

2     G.  E.  52 »375 

5  G.  E.  800 375 

58     G.  E.  1000 425 

2     West.  68 410 

Leased  to  Yonkers  R.  R.  Co. 

104     G.  E.  57 $600 

7     G.  E.  800 375 

18     G.  E.  1000 425 

10     West.  68 410 

2     West.  49 400 

16     G.  E.  210 650 

Leased  to  Tarrytown,  W.  P.  &  M.  Railway  Company 

12     G.  E.  57 $600 

2     G.  E.  800 375 

42     G.  E.  1000 425 

26     West.  68 410 

2     West.  49 ■• 400 

6  G.  E.  210 650 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    251 

Unit  price 
No.         Type  to  reproduce 

Motors  of  Electrically  Equipped  Cars  (continued) : 
Owned  by  Yoxkers  Company 

30     G.  E.  210 $650 

12     G.  E.  1000 425 

17  West.  68 410 

Owned  by  Westchester  Electric  Company 
40     G.  E.  210 S650 

Trucks  of  Electrically  Equipped  Cars 

Owned  and  operated  by  Union  Railway  Co. 

284     Brill  No.  22  E S200 

244     Peck.  Single 250 

59     Diamond  Single 225 

Leased  to  Westchester  Electric  Company 

11  Peck.  Single $250 

18  Diamond  Single 225 

Leased  to  Yonkers  R.  R.  Company 

120     Brill  No.  22  E $200 

9     Peck.  Single 250 

1     Brill  Single 205 

5  Diamond  Single 225 

Leased  to  Tarrytown  W.  P.  &  M.  Railway  Company 

12  Brill  No.  22  E $200 

23     Peck.  Single 250 

11     BriU  Single 205 

6  Brill  No.  39  E.,  M.  T 325' 

Owned  by  Yonkers  R.  R.  Co. 
30     St.  Louis  47- D.  T $200 

7  Peckham  S.  T 250 

Owned  by  Westchester  Electric  Company 
40     M.F.  Brill $200 

SUMMARY  MISCELLANEOUS  CAR  EQUIPMENT 

Unit 

Article                                                 price  Total 

new  No. 
Union  Railway  and  Subsidiary  Companies 

Brakes,  SterUng  hand $15.00  610 

Vestibules,  Portable 25.00  572 

Vestibules,  Second  hand 8 .  00  25 

Circuit  Breakers,  M.  Q 18.00  370 

Circuit  Breakers,  M.  R 20.00  388 

Circuit  Breakers,  West 20. 00  407 

1  Includes  steel  wheels;  other  prices  cast  wheels. 


252  VALUATION  OF  PUBLIC  UTILITIES 

Union  Railway  and  Subsidiary  Companies  (continued): 

Unit 

Article                                                  price  Total 

new  No. 

Gates-Wood 8.00  55 

Controllers,  K-7  or  K-7-C 122.60  9 

Controllers,  K-8  or  K-8-B 112 .  60  89 

Controllers,  K-9 99 .  60  119 

Controllers,  K-10 90.00  417 

Controllers,  K-11 98.00  493 

Controllers,  K-2 100.00  14 

Resistances,  West.  Short 9 .  00  1076 

Resistances,  West.  Long 10. 00  3 

Resistances,  Lundie 8 .  00  92 

Resistances,  G.  E.  Grid 10.00  383 

Resistances,  G.  E.  P.  R 9 .  00  44 

Hood  Switches,  T.  H 8.50  35 

Hood  S^dtches,  West 10.00  43 

Wheels,  per  pr.  steel  drivers,  no  axles 50.00  18 

Wheels,  per  pr.  cast  drivers,  with  axles 20.00  103 

Wheels,  per  pr.  cast  ponies,  with  axles 8 .  00  11 

Wheels,  per  pr.  steel  drivers,  with  axles 65 .  00  7 

Wheel  Guards,  Parmenter 20. 00  62 

Wheel  Guards,  H.  B 20. 00  732 

Registers,  Sterling  Meaker  No.  5 22 .  00  444 

Registers,  International 14 .  00  39 

Registers,  Security 22.00  35 

Heaters,  Set  of  four  complete 18.50  9 

Heaters,  Set  of  six  complete 22.00  186 

Heaters,  Set  of  sixteen  complete 43 .  50  144 

Heaters,  Set  of  eighteen   complete 47.00  5 

Headlights 4.00  1106 

Trolley  Bases,  Complete,  U.  S.  No.  6 18 .  27  621 

Trolley  Bases,  Complete,  U.  S.  No.  11 18 .  00  1 

Lightning  Arresters,  G.  E.  M.  D 6.50  298 

Lightning  Arresters,  West.  M.  P 2. 19  897 

Signs,  "Millen"  type,  Side 6.00  604 

Signs,  "Millen"  type.  End 9.00  1098 

Signs,  "  Millen  "  type.  Vestibule 1.15  380 

Plows 16.00 

Controller  handles  per  pr 1 .  50  1033 

Car  Wiring 589 

YoNKERS  Company 
Miscellaneous  car  equipment, 

Value $16,254 

Westchester  Electric  Company 
Miscellaneous  car  equipment, 

Value $9,567 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    253 


SUMMARY  OF  UNITS 

USED    IN    ASCERTAINING    REPRODUCTION    COST    OF    TRACK    EXCAVATION    FOR 

CONDUIT  CONSTRUCTION.  Third  Avenue,  42nd  Street,  Dry  Dock 
AND  Kingsbridge  Railroads,  briefly  styled  as  "Manhattan 
Companies" 

The  lengths  to  which  the  unit  prices  herein  given  are  appHed,  are  the 
same  as  the  lengths  of  single  track  given  under  "Cost  of  Reproduction  of 
Track." 


Cu.  yd. 


c     j_-  •  J    ■    Cost  per 

Section  per         ,.      ^, 

ft. 


Line  Section  per         ,.      .^ 

Im.  ft 


Third  Avenue  R,  R Park  Row,  Bowery  and  3rd 

Ave.,  Post  Office  to  130th 
St.,  and  Lexington  Ave., 
129th  St.  and  130th  St., 
66th  St.,  3rd  Ave.  to  end 
of    spur,    125th    St.    and 

Manhattan  St 1.1         $3 .  05 

Amsterdam  Ave.  to  191st  St.      1.0  3.35 

Amsterdam   Ave.,    191st    to 

loop 0.8  2.65 

42nd  St.,  M.  &  St.  N.  Ave. 

R.  R 42nd  St.,  E.  to  N.  River,  7th 

Ave.,  42nd  St.  to  45th  St, 

B'way  45th  to  59th  St 

B'way  59th  to  Manhattan  St. 
10th  Ave.,  42nd  to  53rd  St.  . 
10th  Ave.,  53rd  to  72nd  St.  . 
1st  Ave.,  34th  to  42nd  St . . . 

Dry   Dock,   E.    B'way   & 

Battery  R.  R.  Co Throughout 0.85         2.45 

Kingsbridge     Railway 

Company 162nd  St.  to  end  of  line  ....      1.1  4.25 

Union  Railway 135th  Street 0 .  85         2.35 


1.1 

3.20 

1.0 

3.35 

1.15 

5.40 

0.66 

2.20 

1.1 

3.65 

0.84 

2.45 

254  VALUATION  OF  PUBLIC  UTILITIES 


SUMMARY  OF  UNITS 

USED    IN    ASCERTAINING   REPRODUCTION    COST   OF   REMOVING    OBSTRUCTIONS 

OF  Third  Avenue,  42nd  Street,  Dry  Dock  and  Kingsbridge  Rail- 
roads, BRIEFLY  STYLED  AS  "  MANHATTAN  COMPANIES" 

The  lengths  to  which  the  unit  prices  herein  given  are  appHed,  are  the 
same  as  the  lengths  of  single  track  given  under  cost  of  reproduction  of 
"Track." 

Cost  per 
Line  Section  Lin.  Ft. 

Third  Avenue  R.  R Park  Row,   Bowery,   Third  Ave., 

Post  Office  to  130th  Street $5.25 

Lexington  Ave.,  l-29th  and  130th 
Sts.,  66th  St.  3rd  Ave.,  to  end 

of  spur 1.65 

125th  St.,  &  Manhattan  St 3 .  85 

Amsterdam  Ave.,  Manhattan  St., 

to  186th  St 2.20 

Amsterdam    Ave.,    186th    St.,    to 

loop 1-65 

42nd  St.,  M.  &  St.  N.  Avenue 

R.  R 42nd  St.,  E.  to  N.  River 11.00 

7th  Avenue,  42nd  to  45th  St., 
B'way,  45th  to  Manhattan  St., 
First  Ave.,    34th    St.,    to   42nd 

Street 3.30 

10th  Avenue,   42nd   St.,   to   72nd 

Street 1-65 

Dry     Dock,     E.     B'way     & 

Battery  R.  R.  Co Throughout 5 .  50 

Kingsbridge   Railway   Com- 
pany      162nd  St.,  to  end  of  Hne 1 .  65 

Union  Railway 135th  Street 1-65 


\ 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     255 


SUMMARY  OF  UNITS 

USED  IX  ASCERTAINING  REPRODUCTION  COST  OF  PAVING  DUE  TO  OBSTRUCTIONS 
AND  CHANGE  OF  GRADE  ON  ThIRD  AvENUE,  42nD  StREET,  DrY  DoCK 
AND      KiNGSBRIDGE      RaILROADS,     BRIEFLY     STYLED     AS      "MANHATTAN 

Companies" 

The  lengths  to  which  the  unit  prices  herein  given  are  appUed  are  the 
same  as  the  lengths  of  single  track  given  under  cost  of  reproduction  of 
"Track." 

Cost  per 
Line  Section  Lin.  Ft. 

Third  Avenue  R.  R Park  Row,  Bowery  and  3rd  Ave., 

Post  Office  to  130th  St.,  Lexing- 
ton Ave.,  129th  and  130th  Sts., 
66th  St.,  3rd  Ave.  to  end  of  spur.  S2 .  00 

12oth  St.  and  Manhattan  St 7 . 45 

Amsterdam  Ave.,  Manhattan  St.  to 

194th  St 8.30 

Amsterdam  Ave.,  194th  St.  to' loop     1 .  35 

42nd    St.    M.    &    St.    N.    Ave. 

R.  R 42nd  St.  to  E.  and  N.  River. .....  4 .  70 

7th  Ave.,  42nd  St.  to    45th  St., 

B'way,  45th  to  59th  Sts 2 .  00 

B'way,  59th  St.  to  72nd  St 7 .  45 

B'way,  72nd  to  Manhattan  St 7.15 

10th  Ave.,  42nd  to  72nd  Sts 1 .  35 

First  Ave.,  42nd  to  34th  Sts 1 .  75 

Dry  Dock,  E.  B'way  &  Battery 

R.  R Throughout - 2.00 

Kingsbridge  R.  R Kingsbridge  Road,  162nd  St.  to  end 

of  Une...' 1.40 

Union  Railway 135th  Street 2.00 


256  VALUATION  OF  PUBLIC  UTILITIES 

SUMMARY  OF  VALUES 

USED     IN     ASCERT.^NING     REPRODUCTION     COST     OF     TOOLS,     SUPPLIES     AND 

FIXTURES  OF  Third  Ayenue,  42nd  Street,  Dry  Dock,  Kingsbridge, 
Union,  Bronx  Traction,  Southern  Boulevard,  Yonkers  and 
Westchester  Railroads 

Tools: 

65th  St.  &  3rd  Ave $39,614 

65th  St.  &  3rd  Ave.,  Floating  Tools 2,351 

129th  St.  &  3rd  Ave 1,101 

130th  St.  &  Amsterdam  Ave 519 

Grand  St.  Barn 755 

Port  Morris  Depot 129 

Track  Dept.,  Union  R\^  Co.,  Floating  Tools 2,622 

Lines  and  Feeders,  Floating  Tools 1,042 

Kingsbridge  Power  Station,  Fixed  &  Floating  Tools 6,277 

West  Farms  Sub-station,  Floating  Tools 1,004 

West  Farms  Depot 9,705 

AA^est  Farms  Depot,  Floating  Tools 329 

Material  and  Supplies: 

65th  St.  &  3rd  Ave 176,491 

129th  St.  &  3rd  Ave 19,956 

West  Farms  Stock  Room 60,045 

Kingsbridge  Power  Station 40,028 

Bayard  St.  Sub-station 904 

65th  St.  Sub-station 460 

129th  St.  Sub-station 858 

West  Farms  Car  House 36,535 

West  Farms  Sub-station 2,980 

West  Farms  Various  Shops  in  Sub-station 26,150 

Old  Power  Station,  Bronx  River 9,672 

Bronx  River  Car  House 7,186 

Furniture  and  Fixtures: 

Third  Ave.  R.  R 9,850 

Union  Di\'ision 2,935 

Tools,  Supplies  and  Fixtures: 

Yonkers  R.  R 54,409 

Westchester  Electric  R.  R 29,987 

Horses,  Wagons,  Etc.: 

Third  Ave.  R.  R 46,194 

Union  Division 10,680 

Salvage  on  Materials  and  App.vratus: 

Third  Avenue  R.  R 822 

Union  Division 5,000 

Supplemental  Drains: 

Third  Avenue  R.  R 4,805 

42nd  Street  R.  R 26,146 


ARPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     257 

EXHIBIT  NO.  36.     JANUARY  18,  1910 

THIRD  AVENUE  REORGAXIZATIOX 

Case  No.  1181 

Exhibit  Testified  to  by  Henry  Floy,  Consulting  Engineer, 
Before  Public  Service  Commission,  First  District,  at 
Hearing  of  Application  of  Third  Avenue  Bondholder's 
Committee  for  Approval  of  Proposed  New  Securities. 

Estimate  of  Present  Actual  Cost  of  Reproduction  and  Present 
Value  of  tangible  properties  as  a  Going-Concern  (irrespective 
of  any  allowance  for  Development  Expenses). 

Estimated  actual  cost  of  reproduction  tangible  properties,  in- 
cluding construction  and  installation  of  plant,  etc.,  on 
basis  present  day  prices  (as  per  itemized  statement  "A", 
p.  3;  see  also  "  B,"  p.  4) -546,500,000 

Deduct  items  not  subject  to  depreciation,  such  as  real  estate, 

obstructions,  paving  for  obstructions,  etc.,  at  least 6,500,000 

Leaving  to  represent  reproduction  cost  of  tangible  property 

subject  to  depreciation  approximately .$40,000,000 

Deduct  maximum  depreciation  on  said  tangibles,  an  average 

of  25  p.  c 10,000,000 

Leaving  as  present  approximate  value  of  said  tangibles  on  basis 

of  reproduction  cost  less  depreciation $30,000,000 

Add  items  not  subject  to  depreciation  as  above 6,500,000 

Approximate  minimum  present  value  tangible  property 836,500,000 

Stated  in  different  form: 

1.  75  p.  c.  of  reproduction  cost  of  §40,000,000  of  tangibles. . .  .  830,000,000 

2.  Plus  real  estate,  etc.,  not  subject  to  depreciation,  as  above. .  6,500,000 

Total  present  value 836,500,000 

Reproduction  cost  as  above  of  846,500,000 
Includes  no  allowance  for  so-called  "Development  Expenses" 
covering  promotion,  discounts  on  securities,  expenses  of 
financing,  taxes,  interest,  title  insurance,  brokers'  com- 
missions, and  other  general  administration,  legal  and  con- 
tingent expenses  necessarily  attending  such  an  enterprise 
(see  statement  "C,"  p.  4).  Minimum  provision  for  these 
purposes  should  be  25  p.  c,  or 11,625,000 

Making  a  total  cost  of  reproduction  to  a  new  company $58,125,000 

XoTE.  This  estimate  makes  no  allowance  for  franchises  of  Third  Avenue 
and  other  companies,  for  loss  involved  in  changing  from  horse  to  cable 
power  and  from  cable  to  electricity,  for  obsolescence  of  portions  of  plant 
for  good  will,  or  for  working  capital. 

17 


258  VALUATION  OF  PUBLIC  UTILITIES 

"A" 
Estimated  actual  cost  of  reproduction  of  entire  physical  properties 
OF  Third  Avenue  proper,  42d  Street,  Dry  Dock,  Union,  Southern 
Boulevard,  Bronx  Traction,  Kingsbridge,  Yonkers  and  West- 
chester Railroad  Companies  on  basis  of  present-day  prices. 

Building  structures $  7,205,315 

Tracks 10,331,894 

Paving 3,542,644 

Distributing  System.  . ,  .• 2,838,246 

Overhead  Construction 1,200,500 

Duct  Lines 2,116,538 

Power  Equipment 3,495,219 

Rolling  Stock 7,650,934 

Removal  of  Obstructions 1,479,049 

Paving  over  Obstructions 1,389,035 

Real  Estate 4,524,570 

Tools,  Supplies,  Fixtures 553,165 

Horses,  Wagons,  etc 56,874 

Salvage  on  Materials  and  Apparatus ,     5,822 

Total $46,389,805 

Purchase  price  Mamaroneck  &  Larchmont  Road 110,000 

Grand  total $46,499,805 

"B" 

Incidental  and  Contingent  Expenses  Included  in  Actual  Cost  of 

Reproduction 

1.  Administration  expenses  chargeable  to  construction,  including  superin- 

tendence, inspection,  accounting,  salaries  of  officers  and  clerks,  consents 
of  authorities  and  property  owners,  legal,  expenses,  rent,  printing, 
storeroom  expenses,  etc. 

2.  Architects'  and  Engineers'  fees,  including  cost  of  design  and  testing  all 

construction  and  equipment,  etc. 

3.  Provision  for  various  incidentals  and  contingencies,  incomplete  inven- 

tories, unforeseen  requirements,  etc.,  which  practical  experience  has 

shown  to  be  necessary. 
These  incidental  and  contingent  expenses  properly  attributable  to  actual 
construction  would  certainly  extend  over  an  average  of  two  years  and  con- 
stitute capital  expenditures  to  cover  which  an  average  of  at  least  15  per 
cent,  should  be  provided,  except  in  the  last  four  items  in  "A,"  as  above, 
not  requiring  such  allowances. 

"C" 
Development  Expenses 
Outlay  and  expenditures  necessarily  attending  organization  and  pro- 
motion of  an  enterprise  such  as  the  Third  Avenue  and  other  railroads 
mentioned  in  Statement  "A,"  which  will  ordinarily  average  at  least  25 
per  cent,  on  actual  cost  of  construction,  and  in  City  of  New  York  would 
undoubtedly  average  much  more.     These  include 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES    259 

1.  Legal  and  other  expenses  of  preliminary  promotion,  incorpo- 

ration and  organization  of  companies,  procuring  property 
o':vners'  consents,  condemnation  proceedings,  arrange- 
ments for  trackage  rights  and  terminals,  procuring  local 
franchises  and  approval,  consent  and  certificates  from 
Public  Service  Commission  and  other  public  bodies,  title 
examinations  and  insurance,  brokers'  commissions,  etc.,  at 
least i  of  1  p.  c. 

2.  Technical  expenses  in  connection  with  preliminary  work, 

surveys,  expert  estimates,  etc.,  approximately i  of  1  p.  c. 

3.  Interest  on  capital  and  bond  issues,  rents,  and  so-called 

wages  of  superintendence  and  administration  in  addition 
to  portion  similar  expense  chargeable  to  construction,  etc., 
which  must  be  provided  to  cover  development  stage  and 
construction  and  until  property  can  earn  surplus  over  oper- 
ating expenses  and  taxes  sufficient  to  pay  interest  or 
dividends  on  investments.     Minimum  allowance' 81  p.  c. 

4.  Taxes    including    incorporation    tax,    mortgage    tax,    real 

estate  tax,  personal  property  tax,  capital  stock  tax, 
franchise  tax,  etc.,  which  must  be  provided  for  and  paid 
during  period  from  first  organization  to  time  when  property 
will  earn  a   net  surplus  over  operating  expenses,  at  least  i  of  1  p.  c. 

5.  Discounts  on  securities  or  other  customary  and  necessary 

expenditures  in  connection  with  financing  such  an  under- 
taking and  marketing  securities.  These  expenses  greater 
in  case  of  new  enterprises  or  reorganization  of  old  enter- 
prises which  have  become  insolvent,  as  there  is  yet  no 
established  earning  capacity  and  credit,  or  credit  has 
been  impaired  or  destroyed  by  insolvency.  Minimum 
discount-.'. 10  p.  c. 

6.  Seasonable  promotion  profit  or  compensation  for  risk  of 

capital  estimated  at  5  to  10  per  cent,  of  cash  secured  and 
actually  invested  and  put  at  risk  in  enterprise.  Minimum 
allowance-' 5  p.  c. 

These  percentages  calculated  on  basis  of  total  actual  repro- 
duction cost  of $46,500,000 

25  p.  c.  of  which  would  be 11,625,000 


Making  a  total  cost  of  reproduction  by  a  new  company  at  least.  .   $58,125,000 

'  This  figure  would  probably  be  exceeded  in  a  city  like  New  York,  as  also 
some  of  the  other  items. 

-  The  allowance  for  these  items  would  have  to  be  increased  under  con- 
ditions now  existing  in  City  of  New  York.  Value  of  all  street  service 
securities  in  New  York  at  present  time  greatly  discredited.  Money  could 
only  be  raised  at  or  about  par  on  credit  of  City  itself. 

^  A  promotion  profit  of  at  least  10  p.  c.  would  probably  be  necessary  to 
induce  the  investment  and  risk  of  §58,000,000  of  new  capital  in  view  of 
present  conditions  and  earning  capacity. 


260 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT  391 

INTRODUCED  BY  HENRY  FLOY,  CONSULTING  ENGINEER 

Values  of  Items  Used  in  Determining  the  Amount  to  be  Deducted 
FROM  Reproduction  Cost,  New,  to  Obtain  "Absolute  Depreciation" 


Deferred 
maintenance 


Obsolescence 


Vaults  in  streets,  vaults  adjarent  to  buildings,  unused 
boiler,  engine  and  chimney  foundations,  chimneys,  col- 
umn footings,  abandoned  pits 

Buildings,   (detailed  estimates) !         $121,900 

I 
Abandoned    track,    special    work    and    pacing      (Bear 

Swamp  Road) 1 

Track,  special  work  and  paving,  (detailed  estimates) |        1,050,446 

Power  Equipment  (detailed  estimates) 

Distributing  System  (detailed  estimates) 

Overhead  construction  (detailed  estimates) 


64,400 
46,000 
62,410 


$612,378 


15,812 


57,725 

667,975 

Totals                                

$1,402,881 

$1,296,165 

1,402,881 

Grand  Total 

$2,699,046 

1 

Note. — All  values  herein  given  include  the  same  percentages  as  used  in  obtaining  the 
cost  of  reproduction  new. 

^Gase  No.  1181:    Plan  of    Reorganization   Third  Ave.  Railroad  Co.  Decision  dated  July 
29,  1910,  Public  Service  Commission,  First  District,  New  York. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     261 

EXHIBIT  40^ 

INTRODUCED  BY  HENRY  FLOY,  CONSULTING  ENGINEER 
THIRD  AVENUE  RAILROAD  COMPANY 

Case  No.  1181 

Depreciation  as  of  February,  1910,  Including  "Absolute"  and 
"Theoretical" 


Deferred 
maintenance 


Wear  and 
tear 


Age 
inadequacy 
obsolescence 


Totals 


Obsolete   Vaults  and  Founda- 
tions  

Buildings 

Track,  Special  Work  and  Paving 

Distributing  System 

Overhead  Construction 

Duct  Lines 

Power  Equipment 

Rolling  Stock 

Tools  and  Fixtures 

Horses,  Wagons,  etc 


S121,900 

1,050,446 

46,000 

62,410 


64,400 
57,725 


835,000 

3,543,093 

204,810 

26,062 


35,000 

79,000 

3,159 

1,135 


S612,37S 

5782,329 

241,192 

416,513 

330,916 

199,274 

880,292 

1,587,349 

52,807 

14,219 


S612,378 

$939,229 

4,834,731 

667,323 

419,388 

199,274 

979,692 

1,724,074 

55,966 

15,354 


51,402,881 


$3,927,259 


$5,117,269 


$10,447,409 


1  Case  Xo.  1181:  Plan    of  Reorganization  Third  Ave.  Railroad  Co.  Decision  dated'july 
29,  1910,  Public  Se^^•ice  Commission,  First  District,  New  York, 


262 


VALUATION  OF  PUBLIC  UTILITIES 

EXHH 

INTRODUCED  BY  Mr.  E.  G.  COUNETTE,  ENGINEER  OF  1 

Appraisal — Ti^ 

CI 
Comparison  of  Net  Values  as  given  by  The  Pui 


Group 


A  B  CD 

3rd  Ave.  &  Yoakers  Differei, 

Appraiser  Union  Rys.  Difference         R.  R.  Co. 


(1)   Buildings  and  Struc- 
tures  


P.S.C. 
Floy. . 


$5,066,933.60    

5,184,985.74     5118,052.14 


$356,989.00 
356,989.00 


(2)   Track. 


P.S.C. 
Floy. . 


6,725,209.49 
6,725,209.49 


620,020.57 

668,613.26     848,592 


(3)  PaA-ing. 


P.S.C. 
Floy. . 


2.017,494.86     

2,139,629.25       122,134.39 


253,013.50 

296,969.30       43,955 


(4)  Distributing  system . 


P.S.C. 

Floy.  . 


2,175,743.87 
2,175,743.87 


83,006.53 

138,453.531      55,447 


(5)  Overhead      distribu- 
tion  


P.S.C. 
Floy. . 


554,737.55 
.559,651.38 


4,913.83 


166,025.24 

178,616.45  12,59 


(6)  Duct  lines . 


P.S.C. 
Floy.. 


1,. 571, 948. 62 
1,571,948.62 


(7)  Power  Equipment. 


(8)   Rolling  Stock. 


P.S.C. 
Floy.. 


2,661,299.65 
2,661,299.65 


43,976.001 

50,507.40         6,531 


P.S.C. 
Floy. . 


6,453,097.00 
6,453.097.00 


95,515.40 

106,353.90       10,838 


(9)   Removing     obstruc- 
tions  


P.S.C. 
Floy. . 


1,169,209.00     

1,169,209.00       HSee  note) 


(10)  Paving  over  obstruc- 
tions  


P.S.C. 

Floy. . 


1,098,052.00     

1,098,052.00       i(See  note) 


(11)   Real  Estate. 


P.S.C. 
Floy. . 


4,265,220.00 
4,265,220.00 


74,000.00 

!23,.500.00     149,500 


(12)   Tools,     Supplies     & 
Fixtures 


P.S.C. 
Floy. . 


460,.502.00 
468,765.00 


8,263.00 


50,839.00 
54,408.81 


3,569 


(13)   Horses,Wagons,Etc. 


P.S.C. 
Floy. 


.56,874.00 
56,874.00 


(13)   Salvage,  Material  & 
Apparatus 


P.S.C. 
Flov. . 


5,822.00 
5,822.00 


(15)   Not  itemized Floy. 


Total. 


P.S.C. 
Floy. . 


834,282,143.64  : 81,743,-385.24 

34,535,507.00     8253,363.36      2,074,411.65  8331,026 


1  Note. — The  apparent  equality  of  figures  of  two  appraisals  on  items  of  "Removing  Obstructi 
and  "Paving  Over  Obstructions"  is  not  actual  because  Mr.  Floy  adds  percentages  to  his  net  fi 
given  above  to  obtain  his  gross  figure,  while  the  P.  S.  C.  makes  no  addition  to  the  net  figure. 
GWK/C.T.B  4-16-10 


Checked 


G.  W.  KuHN 
J.  L.  M. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES         263 

10.  50 

UBLIC   SERVICE  COMMISSION— FIRST  DISTRICT 

.VENUE  R.\ILROAD  SYSTEM 

fo.  1181 

ERVicE  Commission,  and  as  given  by  Mr.  Henry  Floy 


E 
West.  Elec.     ' 
R.  R.  Co.      ' 

F 

Difference 

G 

Matnaroneck 
Line 

H 

Difference 

I 
Total 

J 

Difference 
of  Totals 

S161,S07.00 
161,807.00 

85,585,729.60 
5,703,781.74 

8118,052.14 

624,793.72 
731,684.16 

821,9.36.14 
(c)See  note 

821,936.14. 
(c)See  note 

7,991,959.92 
(c)8,125,506.91 

8106,890.44 

(0)133,546.99 

312,489.20 
363,911.16 

11,923.22 

(c)See  note 

11,923.22  i 
(c)See  note 

2,594,920.78 
(c)  2,800,509. 71 

51,421.96 

(c)205,o88.93 

83,173.62 
30,698.76 

52,474.86 

2,341,924.02 
2,344,896.16 

2,972.14 

193,512.34 
210,745.00 

3,365.26 
(c)See  note 

3,365.26 
(c)See  note 

917,640.39 
(c)    949,012.83 

17,232.66 

(c)  34,737.70 

1,571,948.62 
1,571,948.62 

« 

46.000.00 
61,213.10 

2,751,275.65 
2,763,020.15 

5,213.10 

11. 744.. 50 

82,250.00 
93,567.20 

6,630,862.40 
6,653,018.10 

11,317.20 

22,1.55.70 

1,169,209.00 
1,169,209.00 

1  098,052.00 
1,098,052.00 

35,900.00 
35,850.00 

50.00 

4,375,120.00 
4,524,570.00 

149,450.00 

.30,002.00 
29,987.36 

14.64 

.541,343.00 
553,161.17 

11,818.17 

56,874.00 
56.874.00 

1 

_^ 

5,822.00 
5,822.00 

-r 

(0)110.000.00 

(0)110,000.00 

(c)    110,000.00 

(c)  110,000. 00 

.,569,927.88 
i  ,709,463.74 

8139,535.86 

S.37,224.62 
110,000.00 

837,632,681.38 
38,429,382.39 

872,775.38 

796,701.012 

(c)  Mr.  Floy  submits  the  purchase  price  of  the  Mamaroneck  Line  as  his  vp'uation  of  the  property;  he 
5|  es  not  give  itemized  values,  and,  therefore,  comparisons  can  not  be  made  between  group  totals  for 
is  line.     This  should  be  borne  in  mind  when  dealing  with  figures  marked  (c)  on  this  sheet. 

'  This  difference  is  mainly  due  to  difference  in  Mamaroneck  Road,  Yonker's  real  estate,  and  date 
appraisals.  Considerable  property  ha\-ing  been  added  after  the  date  of  closing  the  P.  S.  C.  ap- 
aisal  which  was  included  by  Floy. — Author. 


264  VALUATION  OF  PUBLIC   UTILITIES 

EXHIB 

INTRODUCED  BY  MR.  E.  G.  COUNETTE,  ENGINEER 

Third  Aven 

Ca 


Group 


R.  R.  Co. 


1    Buildings  and 
Structures. 


3rd  Ave.  &  Union. . .  . 

56,130,989.66;            $443,799.60 
431,956.69                 34.124.58 

35,687,190.  C 
397,832.1 
180,319.5 

Westchester 

195,786.47 

15,467.13 

1       Total 

$6,758,732.82 

$493,391.31 

$6,265,341.  £ 

2.  Track. 


3rd  Ave.  &  Union. 

Yonkers 

Westchester 

Mamaroneck 


Total. 


3.  Paving. 


3rd  Ave.  &  Union. 

Yonkers 

Westchester 

Mamaroneck 


8,137,.503.49 

750,224.89 

756,000.40 

26,542.73 


$9,670,271.51 


2,441,168.79 

306,146.34 

378,111.93 

14,427.09 


437,273.55 

70,015.14 

71,984.54 

2,527.33 


$581,800.56 


Total. 


4.  Distribution 
System. 


3rd  Ave.  &  Union. 

Yonkers 

Westchester 

Mamaroneck 


$3,139,854.15 


2,632,650.08 
100,437.90 
100,640.08 


908,225.46 
18,354.75 
18,014.93 


Total. 


$2,8.33,728.06 


$944,595.14 


5.  Overhead. 
Distribution. 


6.  Duct  Lines. 


3rd  Ave.  &  Union. 

Yonkers 

Westchester 

Mamaroneck 


671,232.44! 

200,890.54. 

234,149.93! 

4,071.97 


133,506.46 

53,541.33 

56,103.00 

532.67 


Total I     $1,110,344.88 


$243,638.46 


3rd  Ave.  &  Union . 

Yonkers 

Westchester 

Mamaroneck 


1,902,0.57.83 


Total $1,902,057.83 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     265 


aE  PUBLIC  SERVICE  COMMISSION— FIRST  DISTRICT 
.\iLROAD  System 


Deferred 

maintenance 


Remaining  wear 


Present  value 


1,837,795.91 

$1,837,795.91 

101,845.02 

46,161.75 

83,849,394.15 
295,987.09 
134,157.59 

$4,293,193.75 

101,845.02 

330,111.67 

46,161.75 

149,624.72 

'                              ' 

1,985,802.68 

81,985,802.68 

84,279,5.38.83 

$4,772,930.14 

201,484.54 

475,669.82 

48,904.83 

41,424.61 

1,454.39 

2,422,524.82 

340,094.88 

342,008.41 

12,007.72 

3,099,679.18 

388,999.71 

383,433.02 

13,462.11 

4,600,550.76 

291,210.04 

300,582.84 

10,553.29 

5,037,824.31 
361,225.18 

372,567.38 



13,080.62 

$201,484.54 

$567,453.65 

83,116,635.83 

83,885,574.02 

$5,202,869.93 

$5,784,697.49 

443,137.49 

33,718.64 

41,568.24 

1,586.06 

1,220,584.39 

153,073.17 

189,055.97 

7,213.55 

1,663,721.88 

186,791.81 

230,624.21 

8,799.61 

777,446.91 

119,354.53 

147,487.72 

5,627.48 

777,446.91 

119,354.53 

147,487.72 

5,627.48 

8520,010.43 

81,569,927.08 

$2,089,937.51 

$1,049,916.64 

$1,049,916.64 

3.57,984.81 
15,674.01 
16,291.85 

165,706.46 
1,897.01 
1,219.80 

523,691.27 
17,571.02 
17,511.65 

1,200,733.35 
64,512.13 
65,113.50 

2,108,958.81 
82,866.88 

83,128.43 

8389,950.67 

8168,823.27 

8558,773.94 

81,3.30,358.98 

$2,274,954.12 

54,707.61 

26,010.17 

58,680.33 

286.81 

121,666.51 

46,347.77 

37,602.65 

1,558.75 

176,374.12 

85,431.87 

104,773.62 

1,962.61 

361,351.86 

61,917.34 

73,273.31 

1,. 576. 69 

494,858.32 

13,073.93 

8,490.64 

117.05 

115,458.67 

129,376.31 

2,109.36 

5139,684.92 

821,681.62 

8207,175.68 

8368,542.22 

8498,119.20 

$741,802.66 

175,531.85 

838,558.76 

8214,090.61 

81,687,967.22 

$1,687,967.22 

'                              '                                '                                i                             . 

8175,531.85 

38,558.76 

214,090.61 

1,687,967.22 

1,687,967.22 

266 


V  ALU  AT  10  X  OF  PUBLIC  UTILITIES 


EXHII 


Group 

R.  R.  Co. 

Total  cost  to 
reproduce 

Scrap  Value 

Wearing  va 

7. 

Power  Equip- 
ment. 

3rd  Ave.  &  Union. . 

3,220,172.58 
53,210.96 
55,660.00 

242,755 
5,341 
5,340 

19 
37 
50 

2,840,755. 
47,869. 
50,319. 

Westchester 

Total 

53,329,043.54 

18253,437 

06 

82,938,890. 

8. 

Rolling. 
Stock 

3rd  Ave.  &  Union. . 

Yonkers 

.  Westchester 

6,775,751.85 

100,291.17 

86,362.50 

248,850 
3,750 
3,000 

00 
00 
00 

6,526,901. 
96,.541. 
83,362. 

Total 

$6,962,405.52 

8255,600 

00 

86,706,805. 

9. 

Removing 
Obstructions 

3rd  Ave.  &  Union. . 

1,169,209.00 

1,169,209. 

Total 

$1,169,209.00 

81,169,209. 

10. 

Pacing  over 
Obstructions. 

3rd  Ave.  &  Union. . 

1.098,052.00 

1,098,052. 

Total 

$1,098,052.00 

81,098,052. 

11. 

Real  Estate. 

3rd  Ave.  &  Union. . 

Yonkers 

Westchester 

4,265,220.00 
74,000.00 
35,900.00 

4,265,220. 
74,000. 
35,900. 

Total 

$4,375,120.00 

84,375,120. 

12 

Tools,  Supplies 
and  Fixtures. 

3rd  Ave.  &  Union. . 

Yonkers 

Westchester 

460,502.00 
50,839.00 
.30,002.00 

460,502. 
50,839. 
30,002. 

Total 

$541,343.00 

8541,343. 

13 

Horses,  Harness 
and  Wagons. 

3rd  Ave.  &  Union. . 

56,874.00 

56,874. 

Total 

856,874.00 

8.56,874. 

"  '  A  figure  of  8136,716,  representing  the  Brook  Ave.  sub-station,  is  included  in  the  P 
Equipment  group,  and  appears  in  the  columns  for  Cost  to  Reproduce  and  Present  Value,  but 
not  appear  in  the  other  columns  in  the  group.  The  apparent  discrepancy  will  be  avoidec 
subtracting  this  figure  of  8136,716  from  the  figure  for  Cos?  to  Reproduce  before  making  computa 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES 
0.  57 — Continued 


267 


)bsolesceace, 

inadequacy 

and  age 


Deferred 
maintenance 


Wear  and  tear 


Total 


Remaining  wear  I     Present  value 


922,123.91 

922,123.91 
16,754.36 
17,611.83 

1,918,577.48 
31,115.23 
32,707.67 

2,298,048.67 

16,754.36 

36,456.60 

17,611.83 

38,048.17 

$956,490.10 

$956,490.10 

81,982,400.38 

S2,372,553.44 

1,585,603.07 
27,754.79 
8.336.25 


1,585,603.07 

27,754.79 

8,336.25 


4,941,298.78 
68,786.38 
75,026.25 


5,190,148.78 
72,536.38 
78,026.25 


1,621,694.11 

81,621,694.11 

85,085,111.41 

85,340,711.41 

1,169,209.00  ^ 

1,169,209.00 

1          .          . 

;•  "# 

81,169,209.00 

81,169,209.00 

1,098,052.00 

1,098,052.00 

81,098,052.00 

81,098,052.00 

4,265,220.00     :       4,265,220.00 
74,000.00     I  74,000.00 

35,900.00  .35,900.00 


84,375,120.00 

84,375,120.00 

115,125.50 

12,709.75 

7,500.50 


115,125.50 

12,709.75 

7, 500.. 50 


345,376.50 
38,129.25 
22,501.50 


345,.376..50 
.38,129.25 
22,501.. 50 




81.35,3.35.75 

8406,007.25 

8406,007.25 

^_;*C»•^,(^(Jt^  .    «   ._f 

14.01S    .'iO 

14,218.50 

42,655.50 

42,655.50 

'                                                 ■ 

814,218. .50 

814,218.50 

842,655.50 

842 ,6.55.. 50 

1  then  adding  it  to  the  result  of  the  computations  and  in  order  to  obtain  the  Present  Value.  This 
ire  was  treated  in  this  manner  because  a  scrap  value  could  not  be  obtained  owing  to  the  fact  that 
,  estimated  value  for  the  sub-stfction  was  used,  although  the  sub-station  was  not  complete  at  the 
I  e  of  appraisalj" 


268 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBI 


Group 


R.  R.  Co. 


Total  cost  to 
reproduce 


Scrap  value       i    Wearing  valui. 


14.  Salvage  Material  I  3rd  Ave.  &  Union. 

and  Apparatus.   \  Yonkers 

!  Westchester 

Mamaroneck 


5,822.00 


Total. 


$5,822.00 


5,822.0( 


$5,822.0( 


Total. 


.3rd  Ave.  &  Union. 

Yonkers 

Westchester 

Mamaroneck 


38,967,205.72  2,414,410.26  36,416,079. 4f 

2,067,997.49  I           185,127.17  1,882,870. 3^ 

1,872,613.31  '           169,910.10  1,702,703.21 

45,041.79  3,060.00  41,981.7! 


Total  of  Totals. ...   I   $42,952,858.31 


:,772,507.53     i  $40,043,634.75 


April  29,  1910. 
GWK/CTB. 
Checked : 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     269 
0.  57 — Continued 


bsolescence,  T^  r        j 

UGiGrrGQ 
nadequacy  .   ^  i  Wear  and  tear 

maintenance 
and  age 


Total 


Remaining  wear       Present  value 


1,455.50  !               1,455.50  |               4,366.50  |              4,366.50 
I 


$1,455.50 


81,455.50 


84,366.50 


84,366.50 


5,135,231.70 

188. 038. 35 

147,082.01 

286.81 


918,807.31  4,099,840.44  ;  10,153,879.45  26,262,200.01  28,813,326.27 

95,697.40  i  554,122.58             837,858.33  !  1,045,011.99  j       1,230,139.16 

91,483.49  I  577,387.33             815,952.83  i  886,750.38  |       1,056,660.48 

3,157.50  ■  20,780.02               24,224.33  '  17,757.46  20,817.46 


1,470,638.87      81,109,145.70  I   $5,252,130.37  !   $11,831,914.94      828,211,719.84      $31,120,943.37 


270 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT 
INTRODUCED  BY  MR.  E.  A.  COUNETTE,  ENGINEER 

FIRST 

Third  Avenue 

Case 

Comparison  of  Depreciation  a.s  Given  by  Henry  Floy  in 


Group 

Appraiser 

Obsolescence,   j 
inadequacy  and 
age 

Difference 

Deferred 
maintenance 

Buildings  and  Struc- 
ures 

Floy 

P.  S.  C 

51,394,707.00  . 
1,985,802.68 

5591,095.68 

5121,900.00 

Track  and  Pa\'ing. .  .  . 

Floy 

P.  S.  C 

241,192.00 
201,484.54  . 

.39,707.46 

1,050,446.00 
1,087,464.08 

Distributing  System  . 

Floy 

P.  S.  C 

416,513.00 
389,950.67  . 

26,562.33 

46,000.00 

Horses,  Wagons,  etc. . 


Floy... 
P.  S.  C. 


14.219.00 


14,219.00 


Totals. 


Floy... 
P.  S.  C. 


5,117,269.00 
55,470,638.87 


Overhead   Distribu- 
tion 

Floy 

P.  S.  C 

390,916.00 
.  1          139,684.92.. 

191.213.08     i 

62,410.00 
21,681.62 

.Iploy 

P.  S.  C 

199,274.00 
175.531.85  .  . 

23,742.15       . 

Power  Equipment..  . 

.    Floy 

P.  S.  C 

880,292.00  .. 
956,490.10 

i 

76,198.10 

64,400.00 

Rolling  Stock 

.    Floy 

P.  S.  C 

1,. 587,349. 00  ... 
1,621,694.11 

34,345.11      !. 

57,725.00 

Tools  and  Fixtures.  . 

Floy 

P.  S.  C...  . 

52.807.00 

52,807.00       . 

1,402,881.00 
5353,369.87        51,109,145.70 


I  Case  No.  1181  Plan  of  Reorganization  Third  Ave.  Railroad  Co.  Decision  dated  July 
29,  1910,  Public  Service  Commission,  First  District,  New  York. 

Note. — In  order  to  make  comparison  easier,  Mr.  Floy's  figure  for  obsolete  vaults  and 
foundations  was  included  with  his  figure  for  buildings.     For  the  same  reason,  the  figure  of 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     271 

NO.  581 

FOR  THE  PUBLIC  SERVICE  COMMISSION 

DISTRICT 

Railroad  System 

No.  1181 

Exhibit  35  and  as  Prepared  by  Public  Service  Commission 


Difference       Wear  and  tear  i  Difference 


Total 
depreciation 


Difference 


8121,900.00 

$35,000.00 

835,000.00 

81,551,607.00 
1,985,802.08 

8434,195.68 

' 

3,543,093.00 
4,686,562.91 

4,834,731.00 
5,979,511.53 

37,018.08 

1,143,469.91 

1,140,780.53 

46,00.0.00 

204,810.00 
168,823.27 

35,986.73 

667,323.00 
558,773.94 

108,549.06 

40,728.38 

26,062.00 
207,175.68 

419,388.00 
368,542.22 

50,845.78 

181,113.68 

199,274.00 
214,090.61 

1 

38,558.76 



38,558.76 

14,816.61 

64,400.00     ' 

35,000.00 

35,000.00 

979,692.00 
956,490.00 

23,201.90 

57,725.00 

79,000.00 

79,000.00 

1,724,074.00 
1,621,694.11 

102,379.89 

3,1.59.00 
135,335.75 

55,966.00 
135,.335.75 

132,176.75 

79,.369 .  75 

1,135.00 
15,674.00 

15,354.00 
15,674.00 

14,. 5.39. 00 

3v>0  00 

293,735.30 

3,927,259.00 
85,252,130.37 

10,447,409.00 
811,831,914.94 

81,324,871.37 

1  $1,. 384,505. 94 

the  P.  S.  C.  for  salvage  material  and  apparatus  was  included  with  their  figure  for  horses, 
harness  and  wagons. 
April  29,  1910. 
Checked  by:  J.  L.  M 


272  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  69 

TRANSFER  CASE,  NO.  1364 

PUBLIC  SERVICE  COMMISSION 

Estimated  Cost  of  Reproduction  of  the  Existing  Property 

OF  THE  Third  Avenue  Railroad  as  of  June  30,  1911,  Being 

Appraisal  by  Henry  Floy',  Consulting  Engineer 

Table  I 

(Showing  Construction  Cost  and  Excluding  "Development 
Expenses.") 


Physical  property 


[  42(1  Street,; 

Third  Ave.      St.  N.  &   j  Dry  Dock 

M. 


Kings- 
bridge 


Total 


Buildings  and  Structures. . . 

$5,109,673 

Track,     including     Special 

Work,    Excavation    and 

Drains. 

3,043,665 

Paving,  Straight  Track  and 

Special  Work. 

536,559 

Distribution  System,  Cable 

Fittings,  Conductor  Bars, 

Bonds  and  Taps. 

1,392,069 

Ducts,  including  Manholes 

and  Pa^ing. 

933,657 

Power  Equipment,  Electri- 

cal and  Mechanical. 

3,122,201 

5,433,299 

Removal  of  Obstructions. . . 

1,429,025 

Paving  Over  Obstructions.  . 

736,320 

Real  Estate  (as  per  valua- 

tion of  C.  E.  Schuyler). 

3,212,364 

Tools,  Supplies,  Fixtures.  .  . 

461,961 

Horses,  Wagons,  etc 

31,426 

Working  Capital 

500,000 

Carrying  Cost: 

(a)  Interest  during  con- 

struction,     average 

period,   1  1/2   years. 

at  6  per  cent.                ' 

2,334,800 

(b)  Taxes     during     con- 

struction, average 

period,  2  years. 

170,000 

Total  cost  of  construction  ' 

as  of  June  30,  1911. 

828,447,019 

$309,869!      $723,434 


443,148         145,337 


19,785| 

545,353  28,175 

1,148,181,  387,687  i 

479,747]  112,5241 

381,4721  799,664 

81  7551 

2,080j  28,153 

98,000  52,000 1 


5,142,976 


1,755,523'   837,993   $666,195   6,-303,376 
324,268    277,674    134,760   1,273,261 


186,361   2,166,915 


4.38,750    118,847^    163,2521   1,654,506 


3,141,986 

'  6,006,827 

66,889  3,031,782 

56,9261  1,385,517 


4,393,500 

462,797 

61,659 

650,000 


535,163    316,102    114,694   3,300,759 

13,000     25,000 208,000 

,494,420  $3,853,345  $1,389,0771  $40,183,861 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     273 

Table  II 
Development  Expenses 


Non-physical  property 


Legal  and  administration 
expenses  prior  to  and  in 
connection  with  incorpo- 
ration and  organization, 
including  technical  ex- 
penses for  preliminary 
work,  surveys,  expert 
estimates,  etc.,  minimum 
allowance. 

Legal  and  administration 
expenses  in  procuring 
consents  and  certificates 
of  Public  Service  Com- 
mission and  other  public 
bodies,  condemnation 
proceedings,  arrange- 
ments  for  trackage  rights, 
terminals,  etc.,  minimum 
allowance. 

Procuring  property  owners' 
consents. 

Cost  of  administration  and 
wages  of  superintendence 
during  period  of  con- 
struction, not  chargeable 
to  or  included  in  estimate 
of  construction,  mini- 
mum allowance. 

Taxes  (other  than  those 
estimated  as  part  of 
carrying  cost). 

Interest  on  development 
expenses  during  con- 
struction period,  mini- 
mum allowance. 

Title  examination, title  guar- 
antee fees,  real  estate, 
lirokers'  commissions,  in- 
surance, etc.,  not  charge- 
able to  construction. 

Bankers'  commissions  and 
other  customary  and  nec- 
essary expenditures  in 
connection  with  financ- 
ing such  an  enterprise 
and  raising  funds,  mini- 


Third  Ave. 


42d  Street, 

St.  N.  & 

M. 


Dry  Dock 


Kings- 
bridge 


Total 


5200,000   8100,000    S75,000    $50,000    $425,000 


200,000    100,000     50,000     25,000     375,000 
360,000    280,000    200,000     90,000     930,000 


350,000     75,000     40,000     10,000     475,000 
88,000     21,000     16,000     4,500     129,500 

143,760     69,120     45,720     21,540     280,140 


50,000     5,000     10,000 


65,000 


mum  allowance. 

'          750,000 

175,000 

125,000 

40,000 

1,090,000 

Total 

...i     $2,141,760 

$825,120 

$561,720 

$241,040 

$3,769,640 

18 


274  VALUATION  OF  PUBLIC  UTILITIES 

Table  III 
Estimated  Cost  of  Reproduction 


Physical  and  non-physical  ,  _,,  .    ,   . 

^                     1  Third  Ave. 
property 

42  dStreet, 

St.  N.  & 

M. 

Dry  Dock 

Kings- 
bridge 

Total 

1 

Construction  cost $28,447,019 

Development  expense 2,141,760 

$6,494,420    $3,853,345 
825,120         561,720 

$1,389,077 
241,040 

$40,183,861 
3,769,640 

Total '  $30,588,779 

$7,319,540 

$4,415,065 

$1,630,117 

$43,953,501 

EXHIBIT  NO.  74 

TRANSFER  CASE,  NO.  1364 

PUBLIC  SERVICE  COMMISSION 

FIRST  DISTRICT 

Third  Avenue  Railroad  Co. 

Henry  Floy  Consulting  Engineer 

Property  in  Table  I,  Exhibit  No.  69 

Not  Now  Used  for  Railroad  Operation 

(Summary) 


Physical  property 

Third 
Avenue 

42nd 

Street, 
St.  N.  &  M. 

1 

Dry  Dock       ^'J'' 
*      bridge 

1 
1 

Total 

Buildings  &  Structures $47..390  i    $117,212        $551,206 

$715,808 

Track,  incl.  Special  Work, 
and  Paving. 

Rolling     Stock    leased     to 
other    companies    of    the 
Third  Avenue  System. 

Real  Estate 

25,513            84.107 

109  620 

3,650,155 

86.297 

3,736,382 

155,210         259,628 

."iSfi  .'^Ql 

1,001  229 

Interest     during    construc- 
tion. 
Taxes 

346,748   1        43,972         109,953 

500,673 

8,000   '          4,500             7,000 

19,500 

Total $4,207,503   i    $537,052   i  $1,338,657 


$6,083,212 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     275 


Property  in  Table  I  Exhibit  No.  69 

Not  Now  Used  for  Railroad  Operation 
(Summary  of  Details) 
Buildings: 

Dry  Dock: 

Grand,  Corlears  &  Monroe  Sts.,  entire 

(Building  rented  to  Metropolitan  St.  Ry.  Co.) 

Cherry,  Corlears,  Monroe  &  Grand  Sts 

(About  95  per  cent,  of  building  rented  to  Metro- 
politan Street  Railway  Co.) 

14th  Street  &  Avenue  B 

(About  87  per  cent,  of  building  rented  to  Metro- 
politan Street  Railway  Co.) 


42nd  Street: 

42nd  Street  &  Lexington  Ave.,  entire 

(Building  rented  for  commercial  purposes.) 
Manhattan  St.  et  129th  St.,  entire,  part  B 

(Building  rented  for  commercial  purposes.) 
12th  Ave.  &  Manhattan  St.,  part  B,  entire.. . 

(Building  rented  for  commercial  purposes.) 


S79,666 
176,910 

294,630 

$551,206 

$35,947 

76,522 

4.743 

$117,212 


Third  Avenue: 

Bayard  St.     Estimated  value  of  part  rented  for  com- 
mercial purposes 

Amsterdam  Ave.  &  186th  St.,  entire 

(Building  rented  for  commercial  purposes.) 


$40,000 
7,390 


$47,390 
Grand  Total $715,808 

Tracks,  Special  Work  &  Paving: 
Dry  Dock: 

Lewis  St.,  Grand  to  8th  St 

8th  St.,  Lewis  to  Ave.  D 

Columbia  St.  &  Ave.  D.,  Grand  to  14th  St 

14th  St.,  Ave.  D.  to  Ave.  B 

Avenue  A.,  23rd  to  24th  St 

Lispenard  St.,  from  Church  to  Broadway $75,126 

Track  in  car  barns,  14th  St.,  Corlears,  Monroe 8,981 

Total $84,107 


276  VALUATION  OF  PUBLIC  UTILITIES 

42nd  Street: 

109th  St.,  Pleasant  Ave.  to  end  of  line 

Pleasant  Ave.,  109th  to  UOth  St 

110th  St.,  near  East  River,  changes  .052  miles 

86th  St.,  Amsterdam  Ave.  to  river 

12th  Avenue,  34th  to  35th  St 

Total $25,513 

Grand  Total $109,620 

Rolling  Stock: 
Third  Avenue: 

179  New  P.  A.  Y.  E.  convertible  cars 

20  New  P.  A.  Y.  E.  box  cars 

258  Re-built  P.  A.  Y.  E.  cars 

232  12  B.  open  cars 

60  22'  single  truck  cars 

Total §3,650,155 

42nd  Street: 

23  Storage  Battery  cars 

Total 86,227 

Grand  Total $3,736,382 

Real  Estate: 
Dry  Dock: 

Grand,  Corlears  &  Monroe  Sts.,  entire S86,000 

(Building  rented  to  Metropolitan  St.  R3'.  Co.) 

Cherry,  Corlears,  Monroe  and  Grand  Sts 141,516 

(About  95  per  cent,  of  building  rented  to   Metro- 
politan Street  Railway'  Co.) 

14th  St.  &  Ave.  B \ 358,875 

(About  87  per  cent,  of  building  rented  to  Metropoli- 
tan Street  Railway  Co.) 


.$586,391 


Third  Avenue: 

Bayard  St.  (See  note  under  buildings) $32,000 

(Building  rented  for  Commercial  purposes.) 
Amsterdam  Ave.  &  186th  St.,  entire 117,480 

(Building  rented  for  Commercial  purposes.) 
On  account  of  Real  Estate  purchased 5,730 

$155,210 


I 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     277 

42nd  Street: 

42nd  Street  &  Lexington  Avenue,  entire $170,000 

(Building  rented  for  Commercial  purposes.) 
Manhattan  Street  &  129th  St.,  part  B,  entire 88,000 

(Building  rented  for  Commercial  purposes.) 
12th  Ave.  &  Manhattan  St.,  part  B,  entire 1,628 

(Building  rented  for  Commercial  purposes.) 


$259,628 


Grand  Total $1,001,229 


EXHIBIT  NO.  73 

Case  No.   1364 

REPRODUCTION  VALUE 

PUBLIC  SERVICE  COMMISSION 

FIRST  DISTRICT 

THIRD  AVENUE  RAILROAD  CO. 

AVERAGE  UNIT  PRICES  PER  FOOT  OF  SINGLE  TRACK  USED  IN 
ASCERTAINING  REPRODUCTION  COST  OF  REMOVING  OBSTRUC- 
TIONS  ON  THE  Third  Ave.,  42nd  Street.,  Dry  Dock  and 

KiNGSBRIDGE    RAILROADS 


Line 


Section 


Third  Avenue  R.  R.. . 


42nd  St.,  M.  &  St.  N. 
Avenue  R.  R. 


Dry  Dock,  E.  Bdwy  & 
Battery  R.  R.  Co. 

Kingsbridge  Railway 
Company. 


Park  Row,  Bowery,  Third  Ave.,  Post  Office  to  130th 

St. 

Lexington  Ave.,  129th  St.  &  130th  Street,  66th  St. 
3rd  Ave.  to  end  of  spur. 

125th  St.  &  Manhattan  St 

Amsterdam  Ave.,  Manhattan  St.  to  186th  St 

Amsterdam  Ave.,  186th  St.  to  loop 

42nd  St.  E.  to  N.  River 

7th  Ave.,  42nd  St.  to  45th  St.,  B'way,  45th  to  Man- 
hattan St.,  First  Avenue,  34th  St.,  to  42nd  St. 

10th  Ave.,  42nd  St.  to  72nd  St 

Throughout 

162nd  St.  to  end  of  line 


Cost  per 
lin.  ft. 


$11.75 

1.50 

3.50 
2.00 
1.50 
35.00 
3.00 

1.50 
8.70 

1.50 


278  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.   133 

Case  No.   1364 

REPRODUCTION    VALUE 

THIRD  AVENUE  RAILROAD  CO. 

Conduit  Track 

42nd  St.,  Manhattanville  &  St.  Nicholas  Avenue  R.  R. 


Ownership 


Location 


Length 
S.  T. 


Est. 
No. 


Unit 
price 

$ 


Total  $ 


Partial  $ 


Indeter- 
minate $ 


42nd  St.  Line 
End  Line— Lex.  Ave.  . 
Lex.  Ave.-Park  Ave... 
Park  Ave.-Mad.  Ave. 
Mad.  Ave.-End  Line. 

7th  Ave. 
42nd  St.  S.  of  45  .... 

Broadway  Line 
7th  Ave. -Beg.  Duplex 
Beg.  Duplex -9th  Ave. 
9th  Ave.-lOth  Ave.  .  . 
10th  Ave.-l  25th  St... 
125th  St.-Manh.  St. . 
lOth  Ave.  Line 

42nd  St.-53rd  St 

53rd  St. -59th  St 

59th   St.-B'way 

1st  Avenue 
42nd  St.-34thSt 


43,912.84 


4,322.13  Di 10.16 

862.781  DjDup...  12.43 

6.53. 77J  CiDup.  .  11.86     

12,613. 92JDi 10.16   !    128,157.43 


1,015.50 


Dj  Dup... 


12.43 


7,570.24  Dj 10.16 

2,976.74  D^Dup...  12.43 

3,420.01  C^Dup...  12.08 

28,667.47  D^ 10.36 

1,444.50  DJ  Dup...  12.43 


76,913.64 


296,994.99 


5,603.11 
2,954.71 
6,161.20 


CiDupB.  6.77- 
CiDupB.  11.86 
D, 10.16 


62,597.79 


3,869.00  C,  DupB.     6.77 


37,933.05 


26,193.13 


10,724.36 
7,753.71 


12,622.67 


37,000.88 
41,313.72 


17,955.14 


35,042.86 


Totals 

82,135.081  ft 1 

$608,576.69 

S64,126.18 
608,576.69 

$162,413.35 

^ 

1672,702.87 

672,702.87 

Grand  Total 

1              1 

$835,116.22 

' 

APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     279 

EXHIBIT  NO.  133 
Case  No.  1364 
REPRODUCTION  VALUE 
THIRD  AVENUE  RAILROAD  CO. 

Boilers  and  Accessories: 

Division  I.     Boilers,  Settings,  Furnaces  and  Linings,  Stop  Valves,  Water 
Columns,  etc. 
Number  and  Arrangement  of  Boilers: 

Thirty  (30)  520  H.P.  Water  Tube  Boilers  located  on  two  floors,  with 
fifteen  (15)  boilers  on  each  floor. 

Twenty-eight  (28)  of  these  boilers  are  arranged  in  fourteen  (14)  batteries 
of  two  (2)  each.     Four  (4)  of  these  boilers  are  equipped  with  super- 
heaters of  the  internal  U  tube  type. 
Two  (2)  boilers  are  arranged  in  single  settings. 
Dimensions  and  Heating  Surface  of  Boilers: 

Three  (3)  Drums  42"  diam.  x  23'-3"  long,  built  of  1/2"  O.  H.  steel  plate 
with  tensile  strength  of  56,000  lb.  per  sq.  in. 

Two  hundred  fifty-two  (252)  4"  tubes,  18  ft.  long  arranged  in  two  (2) 
horizontal  divisions,  each  6  high  and  21  wide  with  a  total  of  12  high 
and  21  wide.  Tubes  set  in  steel  headers.  Baffling  arranged  in  two 
(2)  vertical  division  walls. 

Total  heating  surface  5200  sq.  ft. 

Working  Pressure  200  lb. 
Boiler  Settings,  Dimensions,  etc.: 

Battery  of  two  (2)  boilers  23'-ll  1/2"  long  x  30'-8"  wide  x  19'-9"  high. 

Single  Setting— 23'-ll  1/2"  long  x  15'-4"  wide  x  19'-9"  high. 

Boilers  are  suspended  from  "I"  beams  carried  between  supporting  col- 
umns. 

Rear  wall  of  brick  12"  thick  including  4"  fire  l:)rick  lining. 

Side  walls  of  brick  17"  thick  including  5"  fire  brick  fining. 

Center  wall  of  brick  34"  thick  at  base,  32"  thick  at  top. 

Drums  are  covered  with  4"  brick  set  rowlock. 

Boiler  Fittings: 

Boiler  Fittings  include.  Safety  Valves,  Stop  Valves,  Water  Columns  and 
Connections,  Superheater  Drains  &  Blow-down  Valve. 

24  Boilers  in  Batteries  of  2  each at  .$14.       B.H.P.  .5174,720.00 

2  Boilers  single  setting at    14.16  B.H.P.      14,750.00 

4  Boilers  in  Batteries  of  2  each  with  super-  at  15.00  B.H.P.  31,200.00 
heaters. 


$220,670.00 
Plus  10  per  cent,  for  Contractor's  Profit 22,067 .  00 


Cost  to  Reproduce  as  above $242,737.00 


280  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO  133 

Case  No.  1364 

REPRODUCTION  VALUE 

THIRD  AVENUE  RAILROAD  CO. 

Cables — High  and  Low  Tension 
4/0  High  Tension,  3  Conductor: 

Total  measured  length 402,237  ft. 

Allowance  for  sag,  etc.,  2  per  cent 8,045  ft. 

Total  length  to  replace 410,282  ft. 

410,282  ft.  at  .S1.085  plus  .$0.10  =  . SI  .185 $486,184.17 

1,000,000  C.  M.  Low  Tension: 

Total  measured  length 390,870  ft. 

Allowance  for  sag,  etc.,  3  per  cent 11,726  ft. 

Total  length  to  replace 402,596  ft. 

402,596  ft.  at  .S0.995  plus  $0.06  =  $1.055 $424,738.78 

500,000  C.  M.  Low  Tension: 

Total  measured  length 3,140  ft. 

Allowance  for  sag,  etc.,  3  per  cent 94  ft. 

Total  length  to  replace 3,234  ft. 

3234  ft.  at  .$0,587  plus  .$0.05  =  .$0.637 2,060.06 

Total .$912,983 .  01 

Plus  10  per  cent,  profit 91,298.30 

$1,004,281.31 

Metropolitan  Street  Railway  Company. — The  Bond-holders  of 
the  Metropolitan  Street  Railway  properties,  aggregating  140 
miles  of  surface  railways  in  New  York  City,  applied  to  the  Public 
Service  Commission  of  New  York,  First  District,  early  in  1911 
for  approval  of  a  proposed  plan  of  reorganization  of  the  system 
along  the  general  lines  already  described  in  the  preceding  pages 
under  the  heading  "Third  Avenue  Railroad  Company." 

Before  the  Court  of  Appeals  had  decided  the  Third  Avenue 
case,  the  Bond-holders  committee  of  the  Metropolitan  Company 
had  engaged  engineers,  Messrs.  Ford,  Bacon  and  Davis  of  New 
York  City,  and  they  had  completed  an  appraisal  and  submitted 
their  figures  at  hearings  before  the  Commission.  The  Commis- 
sion's Engineers  had  also  completed  their  appraisal  of  the  Metro- 
politan properties  and  submitted  the  results  of  their  analysis, 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     281 

when  the  matter  of  valuation  was  practically  ignored  and  the 
Metropolitan  plan  of  reorganization  was  carried  through  on  the 
basis  proposed  by  the  committee,  under  the  court's  decision  in 
the  Third  Avenue  case,  the  Commission  approving  the  proposed 
plan,  although  finding  the  total  value  of  the  property  amounted, 
in  its  opinion,  to  only  $78,501,000,  of  which  $12,000,000  was  for 
real  estate,  $46,000,000  for  plant,  $16,151,000  for  franchise  and 
development  expenses,  the  balance  $4,350,000  being  "contingent 
assets." 

The  results  of  the  appraisals,  however,  made  by  the  tw^o  sets 
of  engineers,  are  none  the  less  interesting  because  they  were 
not  used  as  the  basis  of  the  final  decision  of  the  Commission. 
The  appraisals  cost  many  thousands  of  dollars  both  to  the  Com- 
pany and  to  the  Commission  and  the  care  with  which  the  work 
was  carried  out  is  indicated  in  the  following  exhibits  introduced 
from  the  testimony  in  the  case. 

Exhibit  Xo.  13  is  a  voluminous  exhibit  of  over  one  hundred 
large  pages,  giving  the  values  as  found  by  the  engineers  for  the 
Bond-holders.  Only  pages  1,  2  and  3  of  the  exhibit,  being  sum- 
maries of  the  remaining  pages,  are  here  reproduced.  It  will  be 
noted  that  the  appraisal  included  and  allowed  10  per  cent,  for 
general-contractor  and  5  per  cent,  for  engineering,  figures  which 
are  becoming  quite  generally  accepted  in  appraisal  work.  Inci- 
dentals, instead  of  being  allowed  for  by  a  definite  percentage, 
were  figured  for  each  of  twenty-four  separate  items  shown  in 
Exhibit  No.  14.  It  should  be  noted  that  these  incidentals, 
which  include  omissions,  figured  in  the  way  indicated  amounted 
to  8.8  per  cent,  on  the  estimated  cost  of  reproduction  of  the 
physical  property,  to  which  10  per  cent,  for  contractors'  profit, 
then  5  per  cent,  for  engineering  w^ere  added,  making  a  total  al- 
lowance on  this  account  slightly  greater  than  but  a  close  check 
on  the  very  usual  figure  of  10  per  cent. 

In  addition  to  the  cost  of  reproduction,  the  present  value 
was  estimated,  being  figured  for  theoretical  depreciation  on  a 
5  per  cent,  sinking  fund  basis,  and  Exhibit  No.  19  was  introduced 
as  showing  the  results  obtained  by  the  Bond-holder's  engineers 
in  respect  to  this  matter. 

The  Public  Service  Commission's  engineer  introduced  Exhibit 
Xo.  41  w^hich  corresponds  very  closely,  as  to  net  cost,  with 
the  Bond-holders  figures  as  to  reproduction  new.  The  Com- 
mission's  engineer  allowed  a  general  contractor's  profit  of  10 


282  VALUATION  OF  PUBLIC  UTILITIES 

per  cent,  on  the  cost  of  similar  construction  and  equipment  to 
that  allowed  in  the  Third  Avenue  case,  with  a  further  allowance 
of  15  per  cent,  for  engineering  incidentals,  omissions,  etc.,  on 
the  items,  where  only  10  per  cent,  had  been  allowed  in  the  Third 
Avenue  appraisal.  Depreciation  was  figured  on  the  straight 
line  basis,  as  is  usual  with  the  New  York  Commission,  and  in 
this  respect  differed  by  a  very  large  amount,  $7,500,000,  from  the 
amount  of  depreciation  as  determined  by  the  engineers  for  the 
Bond-holders.  Nothing  can  better  illustrate  the  confused 
thought  of  engineers.  Public  Service  Commissions  and  Utility 
Corporation  managements  than  this  enormous  difference  as  to 
the  present  value  of  physical  property,  due  to  two  diverse  but 
well  approved  methods  of  figuring  theoretical  depreciation. 

As  indicating  the  care  with  which  the  appraisal  work  in 
New  York  City  is  being  done,  typical  pages  from  Exhibit  No.  12, 
showing  details  supporting  Exhibit  No.  13  introduced  by  the 
engineers  for  the  Bond-holders,  are  here  reproduced. 

EXHIBIT  NO.  13  (Pages  1,  2  and  3) 

METROPOLITAN   REORGANIZATION  CASE  NO.   1305 

Ford,  Bacox  &  Davis,  Engineers 

Public  Service  Commission — First  District 

Summary 

1.  Cost    of    Reproduction    of    Metropolitan    Street    Railway 

System,  as  below $102,206,240 

2.  Reorganization  assets  not  included  in  Item  1,  consisting  of 
(a)  cash,  and  (b)  bonds  (SI, 200,000)  and  stock  (§300,000)  of 
Central  Park,  North  &  East  River  R.  R.  Co.,  as  estimated 

by  Reorganization  Committee,  at  least 5,000,000 

§107,206,240 

3.  Add  Net  Investment  in  Superseded  Property  below 13,355,645 

Total $120,561,885 

This  summary  does  not  include  any: 

(a)    "Going  concern"  value,  of  the  character  recognized  bj- 

authoritative  decisions, 
(6)    Value  of  claims  against  various  street  surface  railway 
companies,  described  in  Lot  Thirteen  of  Supplemental 
Decree  of  Foreclosure  of  "4  per  cent.  Mortgage," 

(c)  Special  Value  of  land  for  street  railway  purposes,  as 
distinguished  from  ordinary  purposes, 

(d)  Profits  of  promotion, 

(e)  Discounts  on  securities, 

(/)    Special  value  of  existing  franchises. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     283 

ESTIMATED  COST  OF  REPRODUCTION,  NEW,  AS  EXISTING,  OF 

THE  PROPERTY  OF  THE  METROPOLITAN  STREET 

RAILWAY  SYSTEM 

(Considered  as  Thirteen  Corporations) 

AS  OF  October  1,  1910 

Item  Total 

I.  Development. 

1.  Development      Period      (Obtaining     Rights 
and  Capital). 

A.  Rights. 

a.  Time  and  Expense  of  Development  Or- 
ganization and  Legal  and  technical 
Departments  (Inventory  Priced) $3,061,980 

b.  Cost     of    property     owners'      consents 

(Estimated) 2,529,700       $5,591,680 

B.  Capital. 

a.  Time  and  Expense  of  Development  Or- 
ganization and  Legal  and  Technical 
Departments   (Inventory  Priced) 438,600 

C.  Interest    on    Development    Expenditures 

during  Development  period  (Computed) 802,417 

2.  Construction  Period  (Expenditure  of  Capital  • 
to  Completion  of  Construction): 

A.  Rights  (Completion). 

a.  Time  and  Exp.  of  Permanent  Organiza- 
tion (Inventory  Priced) 183,000 

t).    Initial    Payments    for    franchises    and 

trackage  rights  (Estimated) 4,814,800         4,997,800 

B.  Capital  (Completion). 

a.  Time  and  Exp.  of  Permanent  Organiza- 
tion (Inventory  Priced) $1,233,750 

b.  Payments  to   Underwriting   Svndicates 

(Estimated) 2,500,000         3,733,750 

1 

C.  Interest    on    Development    Expenditures 

during  Construction  Period  (Computed) 2,533,407 

Total  Cost  of  Development $18,097,654 


284  VALUATION  OF  PUBLIC  UTILITIES 

II.  Construction. 

1.  Permanent  Organization,  Time  and  Ex- 
pense     on      Construction       (Inventory 

Priced) 732,250 

2.  Cost     of    Franchise     Security     Deposits 

(Estimated) '. 740,000 

3.  Cost  of  Reproducing  Land  (Exclusive  of 
special  value  for  street  railway  purposes) 

(Appraisal  by  W.  H.  Wheelock) 13,808,987 

4.  Cost  of  Construction  and  Equipment 
based  partly  on  Labor  and  Material  and 
partly  on  Sub-Contracts,  and  as  of  Jan. 
1,  1909,  or  dates  shown  in  Inventories. 

a.    Straight  track  and   paving,    electric 

(Invent.  Priced) $13,983,662 

h.    Special,    track   and    paving,    electric 

(Invent.  Priced) 2,319,189 

c.  Horse  track  and  paving,  straight  and 

special  (Invent.  Priced) 1,317,657 

d.  Ducts  laid  with  track  (Invent.  Priced).       1,485,169 

e.  Ducts     laid     separate     from     track 

(Invent.  Priced) 858,854 

/.     Feeder  cables  and  telephone  system 

(Invent.  Priced) 3,524,468 

g.    Power  Plant  and  sub-station  apparatus 

(Invent.  Priced) 4,256,939 

h.    Buildings  (Invent.  Priced) 8,157,900 

i.  Equipment  of  bldgs.  (Invent.  Priced) .  608,609 
/.     Rolhng      stock,       electric       (Invent. 

Priced) 8,148,019 

k.  Rolling  stock,  horse  (Invent.  Priced) .  710,399 
I.     Fixed  tools  and  appliances    (Invent. 

Priced) 221,013 

m.  4th  Ave.  tunnel  (Invent.  Priced) ....  466,356 

n.    Incidentals  (Invent.  Priced) 3,901,024 

49,959,258 

5.  General  Contractor  10  per  cent,  of  Items 

4a-n 4,995,926 

6.  Cost  of  Engineering,  5  per  cent,  of  Items 

4-5 2,747,759 

7.  Interest  and  Taxes  during  Construction 

(Computed) 7,333,723 


I 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     285 

8.  Furniture  and  Fixt.,  Implements  and  Ap- 
paratus. 

a.  Stores  and  supplies  (Invent.  Priced) .  .      81,518,512 

b.  Office  furniture  and  fixtures  (Invent. 

Priced) 170,953 

c.  Floating  tools,  wagons,  etc.  (Invent. 

Priced) 131,886 

d.  Incidentals  (5  per  cent,  of  Items  8  b 

andc) 15,142 

§1,836,493 

9.  "Working  Capital  (Compiled  from  Receiv- 
ers' Balance  Sheet) 1,182,434 

Total  cost  of  Construction,  as  of  dates 

of  Inventories S83, 336,830 

10.  Cost  of  Construction  added  from  dates  of 

Inventories  to  Oct.  1,  1910 / 771,756 

Total  cost  of  Construction,  as  of  Oct.  1, 

1910 884,108,586 

Total  cost  of  Reproduction,  as  of  Oc- 
tober 1,  1910  (Subject  to  exceptions 
noted  below) 8102,206,240 

Note:  The  above  estimate  does  not  include  any: 

(a)  "Going  Concern"  value,  of  the  character  recognized  by  authoritative 

decisions, 
(6)    Value  of  claims  against  various  street  surface  railway  companies, 

described  in  Lot  Thirteen  of  Supplemental  Decree  of  Foreclosure  of 

"4  per  cent.  Mortgage," 
(c)    Special  values  of  land  for  street  railway  purposes,  as  distinguished 

from  ordinary  purposes, 
{d)  Profits  of  promotion, 
(e)    Discounts  on  securities, 
(/)    Special  value  of  existing  franchises, 

ig)   Reorganization  assets  not  included  in  estimated  cost  of  reproduction, 
(/i)  Net  investment  in  superseded  property. 


286 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT 

METROPOLITAN  STREET 

Plan  For 

Case 

COST  TO  REPRODUCE,  DEPRECIATION  AND  PRESENT  VALUE  AS 


Item 


Net  cost 


Contractor's 
profit 


Net  cost  plus 

contractor's 

profit 


Incidentals, 
administra- 
tion,  engi- 
neering, etc. 


Electric  Track : 

Removal  of  obstruc- 
tions, including  pave- 
ment  

Foundation  and  exca- 
vation .  .  . '. 

Paving  in  track 

Tram    rail,     straight 

track 

Slot  rail 

Conductor  lines 

Special    work    and 

paving 

Horse   track   and   special 

work 

Ducts 

Cables 

Power    plants    and    sub- 
stations   

Buildings 

Buildings — Equipment.  .  . 

Electric  cars 

Horse  cars 

Fixed  tools  and  appliances. 

4th  Avenue  tunnel 

Stores  and  supplies 

Office       furniture       and 

fixtures 

Floating  tools 


$3,234,070.00     83,234,070.00 


7,337,020.00 
2,096,643.00 

1,552,157.00 
549,743.00 
487,164.00 


8733,702.00 
209,664.30 

155,215.70 
54 ,974.. 30 
48,716.40 


8,070,722.00 
2,306,307.30 

1,707,372.70 
604,717.30 
535,880.40 


1,168,141.00         116,814.10        1,284,955.10 


1,123,791.00 
2,444,899.00 
3,-522,689.00 

4,276,177.00 

8,439,606.00 
244,387.00 

8,546,112.00 
677,830.00 
137,798.00 
466,356.00 

1,623,519.00 

106,0.52.00 
130,694.00 


112,379.10 
244,489.90 
352,268.90 

427,617.70 

843,960.60 

24,438.70 


1,236,170.10 
2,689,-388.90 
3,874,957.90 

4,703,794.70 

9,283,-566.60 
268,825.70 

8,546,112.00 
677,830.00 
137.798.00 
466,3.56.00 

1,623,519.00 

106.052.00 
130,694.00 


81,210,608.30 
345,946.10 

256,105.91 
90,707.60 
80,382.06 

192,743.27 


185,425.52 
403,408.34 
581,243.69 

705,569.21 
1,392,-534.99 

40,323.86 
427,305.60 

33,891.50 


69,953.40 


848,164,848.00    83,324,241.70    851,489,089.70  186,016,149.35 


Computer:  FGD. 

Checker:  WCB. 

July  17,  1911  (CTB.) 

Inv.  No.  3785. 

TRANSPORTATION  DEPARTMENT. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     287 
NO.  41 

RAILWAY  CXDMPANY 
Reorganization 

No.  1305 

PREPARED  BY  ENGINEERS  OF  PUBLIC  SERVICE  COMMISSION 


Cost  to 
reproduce 


Salvage  value        Wearing  value  Depreciation 


Present  value 


83,234,070.00 

9,281,330.30 
2,652,253.40 

1,963,478.61 
695,424.90 
616,262.46 

1,477,698.37 

1,421, .595. 62 
3,092,797.24 
4,466,201.59 

5,409,363.91 

10,676, 101.. 59 

309,149.56 

8,973,417.60 
711,721.50 
137,793.00 
5.36,309.40 

1,623,519.00 

106,052.00 
130.694.00 


352,189.16 
185,831.44 
68,670.13 

163,108.35 

76,865.68 

1,270,730.45 

1,081,872.78 

61,829.91 

347,719.93 

5,515.84 

27.559.60 


5534,047.75 


53,234,070.00     ] j     53,234,070.00 


8,747,282.55 
2,652,253.40 

1,611,289.45 
509,593.46 
547,592.33 

1,314,590.02 

1,. 344, 729. 94 
3,092,797.24 
3,185,471.14 

4,327,491.13 

10,676,101.59 

247,319.65 

8,625,697.67 
706,205.66 
110,238.40 
536,309.40 

1,623,519.00 

106,052.00 
130,694.00 


51,602,791.83 
1,326,126.70 

805,644.72 
254,796.73 
273,796.17 

'657,295.01 

672,364.97 

375,774.86 

1,600,699.25 

1,525,440.62 
1,740,204.56 

40,313.10 

3,730,614.24 

643,000.25 

27,559.60 


26,513.00 
32,673.50 


8,218,535.47 
1,326,126.70 

1,157,833.89 
440,628.17 
342,466.29 

820,403.36 

740,2.30.65 
2,717,022.38 
2,855,502.34 

3,883,923.29 

8,935,897.03 
268,836.46 

5,242,803.36 

68,721.25 

110,2.38.40 

536,309.40 

1,623,519.00 

79, .539. 00 
98,020.50 


857,505,239.05        84,175.941.02        553,329,298.03     I  514,795,612.11      542,709,626.94 


288 


VALUATION  OF  PUBLIC  UTILITIES 


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APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     289 


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VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT  NO.   12  (Page  14) 

METROPOLITAN  REORGANIZATION 

Case  No.  1305 

Ford,  Bacon  and   Davis,  Engineers 

Standard  Electric  Track  Construction 

Estimate  No.  1 — 60' 


Number 
per  mile 


Unit  price 


Cost  per  mile 


Tram  rail,  No.  115-279,  60'  0"  Ig 

Drilling  for  tie  rods 

Slot  rail.  No.  58-227,  30'  0"  Ig 

Continuous  rail  joint 

Slot  rail  splice  and  bolts 

Conductor  rail,  No.  21,  30'  0"  Ig 

Conductor  bond 

Insulator  and  bracket 

Bolts,  washers,  shims,  liners,  etc 

Tie  rods 

Yokes,  curbs,  covers,  etc 

Roof  plates,  etc 

Conduit  plates 

Extra  stock  losses,  etc 

Misc.     materials,     drain     pipe,     brick, 
lumber,  etc. 

Track  blocks 

Specification  blocks 

Concrete  cubic  yard 

Track  laying 

Hauling 

Miscellaneous  labor 


176 
4,400 
352 
176 
352 
352 
704 


S38.40  per  gross  ton . 

0.025  each 

S39.40  per  gross  ton  . 

6.00  per  joint 

0.52  per  splice.  .  .  . 
51.52  per  gross  ton  . 
0.3.345  each 


60,720 


S6,939.26 
110.00 

3,591.03 

1,062.00 
183.04 

1,700.16 
235.49 

1,093.31 

805.44 

913.22 

13,914.98 

1,068.23 

1,072.08 
581.00 

3,401.20 


8,750.20 

11,932.80 

943.75 

954.62 


$.59,251.81 


EXHIBIT  NO.  12  (Page  33) 

Electric  Track 
Unit  Cost  for  Excavation 

Cost  per  ft. 

single  track 

Excavating .$1 .  65 

Taking  up  old  paving .13 

Loading  dirt  excavated •.  .  .15 

Hauling  dirt  excavated .27 

Dump  charges .35 

Excavation  for  drainage .21 

Miscellaneous  labor .22 

Oil  for  lighting .02 


S3. 00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     291 

EXHIBIT  NO.  12  (Page  60) 

HORSE  CAR  TRACK 

Unit  Costs,  Estimated 

Cost  per  ft. 
single  track 

A.  9"  Girder  TracIc. 

9"  No.  107  rail  @  .WO  per  ton .$1 .  27 

Ties  y.  p.  3'  center  to  center  @,  $  .50  each .17 

Spikes .05 

Joints .26 

Hauling  and  distributing  material .25 

Dump  charges,  tools,  blacksmith,  kerosene  oil,   etc .17 

Labor .70 

Total  cost  track $2 .  87 

Paving,  1  sq.  yd.  per  ft.  S.  T 3 .  50 

Total  cost  track  and  paving $6.37 

B.  7"  Girder  Track. 

7"  No.  91  rail  @  $40  per  ton .$1 .08 

Ties,  y.  p.  3'  center  to  center  @  $  .50  each .17 

Spikes .05 

Joints .21 

Hauling  and  distributing  material .24 

Dump  charges,  tools,  blacksmith,  kerosene  oil,  etc .17 

Labor , .68 

Total  cost  track $2.60 

Paving,  1  sq.  yd.  per  ft.  S.  T 3 .  50 

Total  cost  track  and  paving $6.10 

C.  Stringer  Track. 

Rail  and  fastenings.  No.  45  @  1  1/2^  per  pound $   .45 

Ties,  y.  p.  2  1/2'  center  to  center .22 

Stringers,  5"  x  7"  8(i  per  ft .16 

Knees  and  spikes,  5^  each  complete .08 

Labor .70 

Total  cost  track $1.61 

Paving,  1  sq.  yd.  per  ft.  S.  T 3 .  50 

Total  cost  track  and  paving $5.11 


292  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  12  (Page  114) 
ELECTRIC  TRACK 

Removal  op  Obstructions,  Unit  Cost 

The  records  of  the  Metropolitan  Street  Railway  Company, 
as  contained  in  cost  sheets,  in  general  show  in  connection  with 
the  removal  of  obstructions,  onh'  bills  from  the  owners  of  ob- 
structions, such  as  gas,  electric,  telephone  and  subwa}^  com- 
panies, the  city  water  department,  etc.,  and  do  not  show  sepa- 
rately all  expense  incurred  by  the  company  on  account  of  such 
work.     The  following  is  an  estimate  of  total  costs : 

Actual  charges  per  foot  in  Construction  Cost  Record $1 .36 

Add  for  Company  Labor  and  Material  not  separated  from  other 

Track  Costs 1 .  30 

Add  for  increase  in  Wage  Rates  1900  to  1910 24 

Add  for  City  Inspectors 12 


Total  Cost  per  Foot S3 .  02 

Use  S3 .  00 


EXHIBIT  NO.   12  (Page  117) 

DUCTS  LAID  WITH  TRACK 

Unit  Cost 

The  following  unit  cost  is  based  on  the  costs  for  the  Kings- 
bridge  Road,  where  for  33,320  feet  single  track  length  there 
were  591,000  duct  feet,  or  about  18  duct  feet  per  foot  of  single 
track. 

Cost  per 
duct  foot 

Labor  per  Company's  records $ .  0733 

Add  for  increase  in  labor  rates  1900  to  1910,  20  per  cent .0146 

Material 08 

Remo\'ing  pa\'ing  and  re-pa\'ing   1/4   cubic  yard  per  foot 

single  track  at  S5  per  square  yard  So. 00 .  0694 

4x18 
Obstruction,  in  addition  to  track,  1/7  of  that  for  track,  S3  per 

foot  single  track,  S3. 00 0238 

7x18 

Total  cost  per  duct  foot S .  2613 

Use  SO .  26 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     293 

Coney  Island  &  Brooklyn  Railroad  Company. — In  1909  a 
citizen  applied  to  the  Public  Service  Commission  of  New  York, 
First  District,  for  a  reduction  in  the  rate  of  fare,  10  cents, 
charged  by  the  Coney  Island  and  Brooklyn  Company,  a  solvent 
and  operating  corporation,  between  Brooklyn  and  Coney  Island. 
At  the  time,  Mr.  B.  J.  Arnold,  Consulting  Engineer  of  Chicago, 
was  in  charge  of  the  valuation  bureau  and  consultant  for  the 
Commission,  which  directed  him  to  make  an  appraisal  of  the 
Railroad  Company's  property  with  a  view  to  determining  the 
proper  rate.  The  applicant's  petition  w^as  finally  denied  by  the 
Commission,  the  finding  being  based  on  the  value  of  the  property 
as  determined  by  the  Commission's  engineer. 

Exhibit  No.  9,  page  1,  gives  Mr.  Arnold's  valuation  of  the 
physical  property,  the  figures  shown  including  an  allowance  of 
10  per  cent,  for  general  contractor,  except  those  values  relating 
to  "Miscellaneous  Stock,  Fixtures,  etc.,"  and  "Real  Estate." 
In  addition  15  per  cent,  was  added  to  cover  "Engineering,  Inci- 
dentals, and  Organization"  in  making  up  the  cost  of  reproduction 
of  the  physical  property.  In  Mr.  Arnold's  testimony  evidence 
was  given  as  to  the  additional  investment  necessary  to  cover 
"  Development  Expenses"  which,  including  something  more  than 
items  ordinarily  covered  by  that  term,  from  the  values  in  this 
case,  would  run  from  a  little  over  30  per  cent,  to  possibly  over 
50  per  cent,  of  the  value  of  the  physical  property  as  given. 

As  exemplifying  Mr.  Arnold's  detail  work,  unit  prices  for  this 
particular  valuation,  and  general  methods,  pages  6,  20,  65  and 
77  1/2  from  Exhibit  No.  9  are  here  reproduced. 

Exhibit  No.  10,  page  1,  is  a  summary  of  Mr.  Arnold's  estimate 
of  depreciation  and  resulting  present  value  of  the  Coney  Island 
and  Brooklyn  property.  Pages  5,  9,  10  of  the  same  Exhibit  are 
given  to  show  the  method  adopted  in  determining  the  various 
classes  of  depreciation. 


294  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  9  (Page  1) 

PUBLIC  SERVICE  COMMISSION,  FIRST  DISTRICT 

B.  J.  Arnold,  Consulting  Engineer 

Coney  Island  &  Brooklyn  Railroad.     Case  No.  1134 

Tangible  Value  as  of  Feb.  1,  1909 

Track $    729,852.80 

Track  Special  Work 241,882.30 

Paving 421,474 .  73 

Overhead  Trolley  Construction 145,965.63 

Overhead  Feeders '. 110,632 .  25 

Underground  Conduits  and  Cables 336,324.49 

Power  Plants  and  Sub-stations 733,393 .  07 

Buildings 579,963 .  80 

Rolling  Stock   1,383,461 .  50 

Total $4,682,970 .  60 

Add   Incidentals,    5   per   cent;    Organization,    5   per   cent.; 

Engineering,  5  per  cent.;  Total,  15  per  cent 702,445.59 

$5,385,416.19 

Miscellaneous  Stock,  Fixtures,  etc 103,679 .  77 

Real  Estate,  Assessed  Value 187,800.00 

Grand  Total $5,676,895 .  96 

EXHIBIT  NO.  9  (Page  6) 

Coney  Island  &  Brooklyn  Railroad 

Cost  to  Reproduce 

Estimate  No.  1 

Cost  to  Construct  One  Mile  of  Single  Track 

Excavation  2787  cu.  yds at 

Ties,  2'  0"  c.c.  2640 

Rail,  L.  S.,  90  lb.,  206-60'  lengths,  141.4  tons 

Rail  Joints,  176 ! 

Tie  Rods,  880 , 

Spikes,  31  kegs 

Double  Bonds,  labor  included,  176 

Concrete,  669  cu.  yds 

Track  Laying,  5280  ft 

Hauling,  160  tons 

Extra  Stock  and  losses 


It         $1.30 

$  3,623.10 

.70 

1,848.00 

39.00 

5,514.60 

3.30 

528.00 

.30 

264.00 

4.00 

124.00 

1.50 

264.00 

6.00 

4,014.00 

.32 

1,689.60 

2.00 

320.00 

200.00 

Total  cost  per  mile $18,389 .  30 

Total  cost  per  foot 3 .  48 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     295 

EXHIBIT  NO.  9  (Page  20) 

CONEY  ISLAND  &  BROOKLYN  RAILROAD 

Cost  to  Reproduce 

90  Lb.  S.  B.  Girder  60'  Rail  laid  on  Ties  2'  6"  c.c. 

On  a  Mile  Basis 

90  lb.  Section  90,  No.  206  Girder  Rail,  60'  lengths, 

141.4  tons at  $39.00  $5,514.60 

Fish  plates  and  Bolts,  176,  per  joint at      1 .  25  220. 00 

Ties  8"  X  6"  x  8'  0"— 2112 at         .70  1,478.40 

Double  Bonds  and  labor,  176 at      1 .50  264.00 

Spikes,  21  kegs at      4.00  84.00 

Track  laying,  5280  ft at         .15  792.00 

Hauling,  150  tons at      1 . 00  150. 00 

Extra  stock  and  losses 150  00 

Cost  per  mile $8,653. 00 

Cost  per  foot 1-64 

90  Lb.  S.  B.  Girder  30'  Rail  laid  on  Ties  2'  6"  c.c. 
On  a  Mile  Basis 
90  lb.  Section  No.  206  Girder  Rail,  30'  lengths,  141.4 

tons at  $37.00  $5,231.80 

Fish  Plates  and  Bolts,  352,  per  joint at      1 . 25  440. 00 

Ties  6"  X  8"  x  8'  0"— 2112 at         .70  1,478.40 

Double  Bonds  and  Labor,  352 at      1 .  50  528 .  00 

Spikes,  21  kegs at      4.00  84.00 

Track  laying,  5280  ft at         .15  792 .  00 

Hauling,  150  tons at      1.00  150.00 

Extra  stock  and  losses 150. 00 

Cost  per  mile $8,854 .  20 

Cost  per  foot 1-68 

60  Lb.    T  Rail  l.\id  on  Ties  2'  6"  c.c.     No  Bonds  Used. 

60  lb.  A.  S.  C.  E.,  T.  Rail  30'  lengths,  94.3  tons.  .   at  $30.00  $2,829.00 

Fish  Plates  and  Bolts,  352 at      1.25  440.00 

Ties  6"  X  8"  x  8'  0"— 2112 at         .70  1,478.40 

Spikes,  21  kegs at      4.00  84.00 

Track  laying  (no  bonds  or  ballast),  5280 at         .10  528 .  00 

Hauling,  100  tons at      1 .  00  100 .  00 

Extra  stock  and  losses 150 .  00 

Cost  per  mile $5,609.40 

Cost  per  foot 1-06 

40  Lb.  T.  Rail  Laid  on  Ties  2'  6"  c.c.     No  Bonds  Used. 

40  lb.  A.  S.  C.  E.,  T  Rail  30'  lengths,  62.9  tons at  $30. 00  $1,887 .  00 

All  other  items — same  as  for  60  lb.  rail 2,780.40 

Cost  per  mile $4,667.40 

Cost  per  foot -88 


296  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  9  (Page  65) 

CONEY  ISLAND  &  BROOKLYN  RAILROAD 

REPRODUCTION  VALUE 

Smith  Street  Power  Plant  (New) 

Mechanical  Equipment 

Item  No.  I.— Six  (6)  604  H.  P.  Babcock  &  Wilcox  water  tube 
boilers,  equipped  with  superheaters  to  raise  the 
temperature  of  the  steam  110  degrees  F.  above  the 
temperature  of  saturated  steam  at  200  lbs.  pres- 
sure. Each  boiler  is  equipped  with  150  sq.  ft.  of 
Neems  shaking  and  dumping  grates $59,260 .  00 

Item  No.  2. — Steel  stack  with  concrete  pile  foundation.  Brick 
and  reinforced  concrete  smoke  flue.  Steel  stack 
200  ft.  high  12'  10"  inside  diameter.  Fire  brick 
lining 24,339.18 

Item  No.  3.— One  30-ton  hand-power  crane  erected  in  place.. . .       2,478.22 

Item  Wo.  4. — Coal  and  ash  handling,  steel  ash  hopper,  steel  coal 
and  ash  cars,  track  and  electric  locomotives. 

Expended  to  date $2,531 .  10 

3  ash  cars  at  $90 270.00 

2  electric  coal  cars  at  $1000  2,000.00 

Electrical  material  and  labor 1,100.00 

Rails,  spikes,  plates  and  labor  for 

track  installation 300.00 

Labor  and   material  for  building 

coal  bin  and  trestle 5,000 .  00 

Incidentals 598.00 

Total 11,799.10 

Item  No.  5. — Forced  draft  equipment:  Two  (2)  Sturtevant 
blowers  and  engines  3/16"  steel  duct  for  forced 
draft.     No.  13  iron  duct  for  cooling  generators. 

Contract  price  for  ducts $1,700.00 

Contract  price  for  ducts,  blowers 

and  engines 1,000.00 

"Extras" 452.58 


Total  to  date 3,152.58 

Estimated   cost  installing   No.   2 

blower  and  engine 200 .  00 

Estimated  extras  to  complete  job.        200.00 

400 . 00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     297 


EXHIBIT  NO.  9    (Page  77  1/2) 

CONEY  ISLAND  &  BROOKLYN  R.  R.  CO. 

Appraisal  of  Rolling  Stock  and  Equipment 
Revenue  Car  Bodies 


No.  of  cars 
in  group 

Builder 

Date  over- 
hauled 

Age 
years 

Unit  price 
new 

Total  cost  to 
reproduce 

Open 

Closed 

10 

10 

36 
4 

40 
10 

11 

8 

18 

7 

24 

1 

10 

10 

J   G.  Brill. . . 

13 

12 

12 

11 

11 

11 

10 

10 

10 

10 

9 

9 

9 

6 

6 

5 

5 

5 

4 

1 

$1430 
1430 
1400 
1270 
1400 
1400 
1305 
1305 
1400 
1400 
1305 
1284 
1284 
1900 
1900 
1480 
1750 
1750 
2064 
2100 

$14,300 

10 

J.  G.  Brill... 

14,300 

J.  G.  Brill... 

14,000 

75 

J.  G.  Brill... 

95,250 

J.  G.  Brill... 

50,400 

73 

J.  G.  Brill... 
J.  G.  Brill.. . 

1908 

5,600 
95,265 

2 

J.  G.  BrUl... 
J.  G.  Brill... 

1908 

2,610 
56,000 

50 

J.  G.  Brill... 
J.  G.  Brill.   . 

1908 

14,000 
65,250 

J.  G.  Brill... 
J.  G.  Brill... 

1908 

14,124 
10,272 

J.  G.  Brill... 
J.  G.  Brill.. . 

1908 

34,200 
13,300 

50 

J.  G.  Brill... 

74,000 

Kuhlman.. .  . 

1908 

42,000 
1,750 

J.  G.  Brill..  . 

20,640 

J.  G.  Brill..  . 

21,000 

260 

199 

$658,261 

298  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  10 
CONEY  ISLAND  &  BROOKLYN  RAILROAD 

Case  No.  1134 

Public  Service  Commission,  B.  J.  Arnold,  Consulting  Engineer 

DEPRECIATION  AND  PRESENT  VALUE 

AS  of  February  1,  1909 

Recapitulation 


Depreciation 


Due  to  obso- 
lescence, in-    I  Due  to  nor- 
adequacy  and       mal  wear 
age 


Duo  to  de- 
ferred main- 
tenance 


Total  de- 
preciation 


Present 
value 


and 


Track 

Special    work 

bonding 

Pacing 

Overhead  trolley 

Overhead  feeders 

Underground  conduit   and 

Cables 

Power  plant: 

Old  mechanical 

Old  electrical 

New  mechanical 

New  electrical 

Sub-stations: 

De  Kalb  Ave 

Kings  Highway 

Buildings 

Rolling  stock 


77,570.07       233,922.90 


0.00 
24,608.76 

0.00 
26,044.33 

0.00 

98,119.80 

51,904.03 

0.00 

0.00 

0.00 

0.00 

201,524.73 

552,111.80 


101,531.89 

167,243.63 

46,224.40 

3,068.18 

15,419.02 

4,2.50.00 

1,050.00 

0.00 

0.00 

0.00 

0.00 

9,349.00 

114,921.74 


57,379.92 

28,304.21 

34,504.38 

0.00 

0.00 

0.00 

5,750.00 

700.00 

800.00 

0.00 

0.00 

0.00 

1,402.00 

42,065.24 


368,872.89 

129,836.10 

226,356.77 

46,224.40 

29,112.51 

15,419.02 

108,119.80 

53,654.03 

800.00 

0.00 


212,275.73 
709,098.78 


470,457.83 

148,328.54 

258,339.17 

121,636.07 

98,114.57 

371,354.13 

55,952.47 

43,835.73 

254,657.35 

233,297.63 

58,601.13 

34,483.90 

539,460.69 

881.881.95 


81,031,883.52    8696,980.76     8170,905.77    81,899,770.03    83,570,401.16 


Miscellaneous  stock,  fixtures,  etc.,  no  depreciation 103,679.77 

Real  Estate,  assessed  value 187,800.00 

Total  present  value  of  physical  property 83,861,880.93 

To  this  total  should  be  added  the  allowance  for  development  expenses  and  working  capital  to  get 
Total  Present  Value 


I 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     299 
EXHIBIT  NO.  10  (Page  5) 

CONEY  ISLAND  &  BROOKLYN  RAILROAD 

Present  Value  as  of  February,  1,  1909 
Paving 

(a)  Cost  to  Reproduce $421,474 .  73 

Add  15  per  cent,  for  Incidentals 

Administration  &  Engineering 63,221 .21 

Total  Cost $484,695.94 

(b)  Scrap  Value: 

1460.90  sq.  yds.  granite  at  10^ $14,609  14,609  00 

Asphalt  o.  Cobble  o: 

(c)  Service  Value  {a)-{b) 470,086.94 

(d)  Obsolescence: 

No  obsolescence  on  Granite  &  Asphalt  paving 
Total  Cost  Cobble  Pavement: 

29928.6  sq.  yds.  at  65^ $19,453.58 

Add  10  per  cent.  Profit 1,945 .  35 

21,398.93 
Add  15  per  cent 3,209.83 

Total  Obsolescence 24,608  76 

(e)  Normal  Wear ^ $383,158.85 

Cost  to  Replace 

Entire  Pavement 

Less  Cost  of  Cobble 19,453.58 

363,705.27 
Less  Salvage 
2  X  Scrap 29,218 

1/2  of $334,487.27  $167,243.63 

(/)    Deferred  Maintenance: 

By  Inspection $  34,504.38 

(g)    Remaining  Service  Value 243,730 .  17 

(h)  Present  Value $258,339 . 1 7 


300  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  10  (Page  9) 

CONEY  ISLAND  &  BROOKLYN  RAILROAD 

Present  Value  as  of  February  1,  1909 

Underground  Conduits  and  Cables 

(a)  Cost  to  Reproduce $336,324.49 

Add  15  per  cent,  for  Incidentals,  Admin- 
istration and  Engineering 50,448 .  66 

.S386,773.15 

(6)  Scrap  Value: 

Material  allowed  at  follo^ving  prices: 

Copper,  110  lb.  Lead,  3  3/4 ^i  lb. 

Triple  Braid  Weatherproof, 

500,000  c.  m.,  1.57  lbs.,  copper 17. 3 ^  per  foot 

No.      0000,      0.66  lbs.,  copper 7.30  per  foot 

600  volts  paper  insulated  1/8"  lead  covered 

1,000,000  C.  M.     3.14  lbs.,  copper. .   34.60 
3.2    lbs.,  lead 12.10 

Total 46 .  70  per  foot 

500,000  C.  M.,  1.57  lbs.,  copper 17.30 

1.89  lbs.,  lead 7.10 

Total 24.40  per  foot 

Bare  Stranded  Cables. 

500,000  c.  m.,  1.57  lbs 17.30  per  foot 

Three  Conductor  11,000  Volt  C,\ble. 

No.  000,  1.59  lbs..  Copper 17.40 

3.46  lbs.  Lead 13.00 

Total 30.40  per  foot 

No.  2,  0.63  lbs.,  Copper 6.90 

2.9  lbs.,  lead 10.90 

Total 17.80  per  foot 

11,000  Volt,  3  Conductor  Cables,  Scrap  Value: 
Line  No.  1—34,760"— No.  000  Cable  at  30.40      $10,567 .  04 
Line  No.  2— 57,792"— No.  2  Cable  at  17.80 .  .         10,286 . 98 
Gowanus  Canal,  370"  No.  2  Cable  at  17.80. .  .  65.86 

Rockwell  Sta.,  350"  No.  000  Cable  at  30.40. . .  106.40 

.$21,026.28 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     301 

EXHIBIT  NO.  10  (Page  10) 

600  Volt  Cable,  Scrap  Value: 

1,000,000  c.  m.  44,587"  at  46.7^ $20,822 .  13 

500,000  c.  m.    9,680"  at  24.4^ 2,361 .  92 

1,000,000  c.  m.        740"  at  46.7^ 345.58 

S23,529.63 

Bare  Cable,  Scrap  Value: 

500,000  c.  m.  12,200"  at  17.3^ 2,110.60  2,110.60 

Scrap  Value  all  cables $46,666 .  51 

(c)  Service  Value  (o)-(6) 340,106 .  64 

(d)  Obsolence,  Inadequacy  and  Age: 

As  the  conduit  and  cable  system  are  modern,  no  oljsolescence  has  been 
considered. 

(e)  Normal  Wear: 

All  high  tension  cables  are  new  with  the  exception  of  one  feeder  (No.  18) ; 
practically  all  direct  current  feeder  cables  were  installed  in  1904 
and  have  been  in  place  5  j-ears. 

Owing  to  electrolysis  the  probable  average  life  of  these  cables  will 
not  be  over  10  years,  therefore,  1/2  of  the  cost  of  a  complete  mainte- 
nance will  equal  the  deduction  to  be  made  for  normal  wear  to  date. 

To  insulate  and  relead  a  1,000,000  cable  costs  31  (i,  freight  allowed  one 
way.  To  pull  out,  ship  and  pull  in  this  cable  would  cost  21^, 
making  cost  of  maintenance  520,  which  is  equal  to  50  per  cent,  of  the 
first  cost. 

To  reinsulate  and  relead  a  500,000  c.  m.  cable  cost  19.4^i  per  foot  and 
allowdng  120  for  labor  and  freight  one  way  brings  cost  of  complete 
maintenance  to  31.40,  about  50  per  cent,  of  first  cost. 

The  measure  of  normal  wear,  therefore,  is  1/2  of  50  per  cent,  of  first 
cost,  or  25  per  cent,  of  $61,676.08  =  $15,419.02. 
(/)  Deferred  maintenance  nominal. 

(g)  Remaining  Service  Value $324,687 .  62 

{h)  Present  Value $371,354. 13 

Kings  County  Lighting  Company. — The  Kings  County  Light- 
ing Company  was  supplying  gas  at  $1.00  per  thousand,  in  the 
thirtieth  ward  of  Brooklyn,  when  in  September,  1910,  a  petition 
was  presented  to  the  Pubhc  Service  Commission  to  reduce  the 
rate.  The  Company  had  been  gradually  reducing  rates  from 
$2.00  in  1894  until  the  Sl.OO  rate  was  reached  in  1901.  As  the 
result  of  an  investigation,  based  on  an  examination  and  valua- 
tion made  by  its  own  engineers  as  well  as  from  a  consideration 
of   the   testimony   and   appraisals   offered   by   the   Companies' 


302  VALUATION  OF  PUBLIC  UTILITIES 

representatives  and  experts,  the  Public  Service  Commission  fixed 
the  rate  at  85  cents  per  thousand  feet  for  gas  suppHed  from 
November  1,  1911  to  December  31,  1912,  and  80  cents  for  the 
year  1913. 

The  value  of  the  total  property  of  the  Company,  as  of 
December  31,  1910,  was  found  by  the  Commission  to  be  as 
follows: 


Net  cost  of  tangible  property  other  than  land,  etc $1,561,628 

Contractor's  profit,  engineering  admin,  contg.  and  incidentals.  .         341,149 


Cost  tcureproduce  new $1,902,777 

Depreciation 415,198 

$1,487,579 
Land — present    value 650,000 

Present  value  of  plant,  etc $2,137,579 

Preliminary  and  development 260,000 

Working  capital 80,000 

« — 

Total $2,477,579 

On  the  following  pages.  Exhibits  No.  17  and  18,  introduced 
by  the  Commission's  Engineer,  are  shown  the  appraised  values 
of  the  property  including  all  paving  over  mains  and  services 
regardless  of  whether  the  paving  was  put  down  before  or  after 
the  pipes.  In  its  opinion  and  decision,  the  Commission  ex- 
cluded the  value  of  paving  laid  after  the  installation  of  mains 
and  services  on  the  ground  that 

"the  Company  i.s  not  entitled  to  charge  a  rate  sufficient  to  pay  dividends 
upon  property  which  it  does  not  own,  which  it  has  not  constructed,  and 
for  which  no  expenditures  have  been  incurred  by  the  Company  either 
directly  or  indirectly," 

despite  the  fact  that  the  Commission  was  considering  figures 
made  to  show  the  cost  of  reproduction.  Furthermore,  the  Com- 
mission modified  and  increased  certain  unit  prices  of  its  engineer 
on  the  ground  that  the  evidence  introduced  showed  the  prices 
used  by  him  were  too  low, 

"adequate  allowance  not  having  been  made  for  various  expenses  con- 
nected with  the  construction  of  mains  and  services," 

it  also  increased  real  estate  values  by  $400,000   so   that   the 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     303 

exhibits  here  reproduced  differ  in  these  items  from  the  total 
amounts  given  in  the  printed  opinion. 

The  experts  for  the  Company,  Messrs.  WilHam  A.  Baehr  of 
Chicago,  and  William  W.  Randolph  of  New  York,  made  separate 
valuations  of  the  Company's  property. 

Mr.  Baehr's  total  value,  on  the  basis  of  reproduction  cost,  was 
$4,252,543,  including  $781,916  for  going  value  which  was  esti- 
mated along  lines  described  by  Messrs.  Metcalf  &  Alvord,  as 
explained  in  Chapter  VII.  The  itemized  valuation  offered  in 
evidence  by  Mr.  Baehr  is  too  voluminous  for  reproduction  herein, 
but  his  unit  prices  and  the  method  of  developing  them  are 
sufficiently  interesting  and  instructive  to  give  in  full.  Exhibit 
No.  29. 

Mr.  Randolph's  value  for  the  total  property  was  $4,335,222, 
including  $600,000  for  going  value,  the  items  being  set  forth  in 
the  following  Exhibits  A,  B,  C  and  D. 

As  shown  by  its  Engineer's  exhibit,  and  as  set  forth  in  its 
opinion,  the  Commission  allowed  the  usual  percentage  of  10  per 
cent,  for  contractor's  profit  and  15  per  cent,  for  engineering, 
etc.,  amounting,  in  the  revised  figures,  to  an  average  of  21.8  per 
cent,  added  to  the  total  net  cost. 

Present  value  was  estimated  by  deducting  only  theoretical 
depreciation  from  the  cost  of  reproduction  on  the  following 
basis: 

"In  determining  the  present  value  of  the  property,  an  examination 
of  its  physical  condition  was  made  to  determine  what  if  any  deferred 
maintenance  existed.  This  examination  showed  that  the  property  was 
in  excellent  repair  and  that  no  deductions  from  the  value  of  the  prop- 
erty should  be  made  in  order  to  allow  for  the  property  not  being  in  an 
efficient  operating  condition.  The  depreciation  as  determined  is  there- 
fore based  on  the  age  of  the  various  component  elements.  At  the  time 
this  inventory  of  the  property  was  made,  the  age  of  each  article  or 
element  was  ascertained.  The  probable  life  of  each  element  was  then 
determined  by  a  consideration  of  the  existing  conditions  under  which 
it  is  used  and  a  study  of  statistics  of  the  life  of  similar  apparatus. 
From  this  estimated  life  an  annual  depreciation  was  determined  on  a 
straight  line  basis,  that  is,  a  uniform  depreciation  per  year.  The  total 
depreciation  to  date  of  each  part  was  then  computed  and  deducted 
from  the  cost  to  rei^roduce,  leaving  the  present  value." 

In  making  up  the  total  fair  value  of  the  property  on  which 
the  Company  was  entitled  to  earnings,  the  Commission  including 


304  VALUATION  OF  PUBLIC  UTILITIES 

nothing  for  going  value  ''beyond  what  has  ah-eady  been  con- 
ceded should  be  made  in  determining  the  fair  rate  of  return," 
but  after  obtaining  the  depreciated  or  "present  value"  of  the 
plant  added  S260,000,  over  12  per  cent.,  for  "  prehminary  and 
development  expenses"  and  $80,000,  nearly  4  per  cent.,  for 
working  capital,  making  an  aggregate  of  almost  exactly  16  per 
cent,  for  "development  expenses"  added  to  the  total  value  of 
the  physical  property,  of  which  30  per  cent,  was  real  estate. 
The  Company  refused  to  comply  with  the  ruling  of  the  Com- 
mission, reducing  its  rates,  and  is  now  contesting  the  order  in 
the  courts. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     305 


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306  VALUATIO}^  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  17 

Case  No.  1275 

Appraisal  of  Kixgs  County  Lighting  Company 

Net  Cost 

Boilers,  Furnaces  and  Accessories 

Acct.  G-141a 

1  B.  &  W.  215  H.  P.  boiler S  3,041.80 

2  B.  &  W.  106  H.  P.  boiler 3,050.73 

2  B.  &  W.  106  H.  P.  boiler 3,426.  73 

2  Worthington  feed  water  pumps 250 .  26 

1  Oil  tank 3 .  50 

1  Water  barrel 1-00 

1  Steel  stack 831.88 

1  Steel  stack 812 .  00 

1  Steel  stack 840.00 

1  Berryman  feed  water  heater 392 .  50 

Coal  handling  machinery — misc 475 .  68 

3  Coal  cars 450.00 

Coal  conve>'ing  machinery 320 .  72 

Wooden  spUt  pulley 15 .  00 

SoUd  iron  pulley 6 .  00 

Rubber  comp.  belting 20 .  00 

Coal  handling  machinery,  track,  etc 1,757 .  50 

1-3  Ton  Howe  Ry.  platform  scale 242 .  00 

Coal  hopper \ 101.59 

1  Single  vertical  engine 240 .  00 

Coal  hopper  with  screen 125 .  00 

1  Mast  and  Gaff 865.81 

1  Clam-shell  bucket 400.00 

1  Rawson  &  Morrison  Mfg.  Co.  hoist 750.00 

Levers,  etc.,  hoisting  engine 16.98 

1  75  H.  P.  vertical  boiler 824.50 

1  50  H.  P.  vertical  boiler 597 .  90 

1  100  H.  P.  Mason  horizontal  boiler 1,905 .  54 

1  Cameron  feed  water  pump 230 .  00 

1  Turbo  blower  std.  damper  regulator 69.00 

25-ft.  IJ-in.  Steam  rubber  hose 21 .  88 

10-ft.  1-in.  Steel  jointed  ^vire  covered  steam  hose 11 .20 

20-ft.  If-in.  wire  bound  steam  hose 23  .  20 

1  Wooden  ladder,  12  ft 2.76 

2  Iron  wheelbarrows 10 .  00 

2  Water  pails -60 

Rack  for  irons 4 .  30 

4  12-ft.  Hose    10-00 

4  12-ft.  Shce  bars 7 .  00 

4  Scoop  shovels 3 .  44 

1  Stack  5  ft.  dis.,  125  ft.  high 750.00 

Net  cost  acct.  G-141a $22,928.00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     307 

EXHIBIT  NO.  17 

Case  1273 
Appraisal  of  Kings  County  Lighting  Company 
Net  Cost 
Water  Gas  Sets  and  Accessories 

Acct.  G-143a 

1  12-ft.  Williamson  vertical  single  unit  generator $24,012.97 

1  8-ft.  Lowe  generating  set 8,959 .  21 

2  8-ft.  Lowe  generating  sets 19,077 .  91 

2  Condensers 4,752 .  08 

2  Condensers 5,411 .08 

2  Berryman  oil  heaters 500 .  00 

2  90  H.  P.  high  speed  center  crank  automatic  engines 4,579.63 

2  No.  11  Blowers ; 956.12 

180  ft.  leather  belting 234 .  00 

Miscellaneous  gauges,  etc 58 .  53 

1  2-ton  hydraulic  elevator 840 .  00 

Blast  piping 1,072.41 

4  Charging  cans 588 .  00 

1  90  H.  P.  Terry  turbine  blower 2,790 .  25 

1  Coal  spout 2 .  25 

1  2-ton  elevator 925 .  00 

2  Coal  buggies 120.00 

1  Coal  car 50.00 

1  Coal  yoke 10-24 

1  Wheelbarrow 5 .  00 

Miscellaneous  gen.  tools 121 .  58 

Net  cost,  acct.  G-143a $74,866 .  26 

Taken  as $74,866.00 


EXHIBIT  NO.   17 

Case  1273 

Appraisal  of  Kings  County  Lighting  Company 

Net  Cost 

Holders 

Acct.  222 

1  2,000,000  cu.  ft.  holder $148,570.95 

1      500,000  cu.  ft.  holder 51,244.60 

1      107,000  cu.  ft.  holder 17,045 .  46 

1      100,000  cu.  ft.  holder 15,571 .  05 

Net  cost,  acct.  222 .$232,432.06 

Taken  as $232,432.00 


308  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.-  17 

Case  1273 

Appraisal  of  Kings  County  Lighting  Company 

Net  Cost 

Accessory  Equipment  at  Works 

Group  "A"  Acct.  225 

1  No.  10  Root's  exhauster $  2,949 .  09 

Foundation,  washer  scrubber 830 .  53 

1  No.  8  Root's  exhauster 1,771 .  22 

2  No.  6  Root's  exhausters 2,172 .  61 

1  Paint  spraying  machine 30 .  00 

1  Oil  separator 50 .  00 

1  5-gaI.  sheet-iron  oil-can .75 

1  No.  1  Pitcher  pump 3 .  00 

2  60-gal.  oil  tanks 11.50 

1  Oil  pump 107 .  34 

1  Oil  compression  tank 22 .  73 

1  5-gal.  sheet-iron  oil-can .75 

1  Drip  line  pump 93 .  54 

1  Drip  Une  pump 118 .  54 

1  Pressure  oil  tank 9 .  23 

1  Tar  circulating  water  pump 305 .  89 

2  Water  pails   .60 

1  Grindstone 5.00 

1  Tar  circulating  water  pump 183 .  39 

1  Oil  filter 16.90 

3  60-gal.  oil  tanks 15 .  00 

1  Oil  pump * 625.00 

1  12-ft.  station  meter 5,318 .  73 

1  Wyley  proportional  station  meter   250 .  75 

1  Wagon  scales 329.79 

1  Water  meter 80.00 

1  Low  pressure  regulator 18.00 

1  Tar  setthng  tank 2,414 .  03 

1  20,000-gal.  water  tank 487.96 

2  3500-gal.  tar  tanks 362 .  10 

400  ft.  1-in  d.  Manilla  rope 10. 00 

60  ft.  3/4-in.  wdre  wound  hose 3 .  06 

25  ft.  5/16-in.  chain 1 .  00 

200  ft.  3/8-in.  wire  rope 8 . 00 

100ft.  firehose 25.00 

1  Pipe  truck 11 .  20 

1  Oil  tank 13.50 

3  24-in.  Manometer  gauges 39 .  15 

1  Tar  pump .' 186. 20 

1  Tar  pump 186.20 

1  Water  pump 247 .  85 

1  Simple  engine,  vertical 150 .  00 

33  ft.-5-in.  leather  belt 23.76 

1  Blower 49.00 

Forward $19,537.89 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     309 


EXHIBIT  NO.  17 

Case  No.  1273 
Appraisal  of  Kings  County  Lighting  Company 
Net  Cost  • 
Trunk  Lines  and  Mains 


Mains 

Unit  Price 

Acct.  No.  231 

264  ft. 

Uin.. 

.     at  $   .  1839 

$          48.55 

3,706  ft. 

U  in  . 

.     at 

.2024 

750.09 

2,937  ft. 

2  in.. 

.     at 

.2246 

659 . 65 

13,011  ft. 

3  in.. 

.     at 

.3150 

4,098.47 

359,146  ft. 

4  in. . 

at 

.4150 

149,045.59 

365,208  ft. 

6  in.. 

.     at 

.600 

219,124.80 

42  ft.  W.I 

6  in.. 

.     at 

.748 

31.42 

19,108  ft. 

Sin.. 

at 

.876 

16,738.61 

Ill  ft.  W.I 

Sin.. 

.      at 

1.176 

130.43 

48,668    ft. 

12  in.. 

.      at 

i.352 

65,799.14 

70  ft.  W.I 

10  in  . 

.     at 

1.666 

116.62 

6,966  ft. 

16  in  . 

at 

2.040 

14,210.64 

9,377  ft. 

20  in. 

.     at 

2.796 

26,218.09 

61ft. 

24  in . . 

.     at 

3.694 

225.33 

$497,197.43 

Fittings: 

Crosses 

.     at  $.027  per  lb. 

•14,855.92 

Tees 

.     at 

.027  per  lb. 

1,347.36 

Elbows 

at 

.027  per  lb. 

438.09 

Reducers  and  increaser 

s.     at 

.027  per  lb. 

903.57 

Caps  and  plugs 

.     at 

.027  per  lb. 

718.92 

Sleeves 

at 

.027  per  lb. 

24.44 

$8,288.30 

Pavement: 

Asphalt,  30,325.51  sq.  yd at  $3.00  $  90,976.53 

Asphalt  block,    2,727.05  sq.  yd  .at    3.50  9,544.67 

Belgian  block,    5,524.56  sq.  yd   .at       .50  2,762.28 

Brick,  1,441.58  sq.  yd   at    2.50  3,603.95 

Granite,  1,444 .  98  sq.  yd  at       .50  722 .49 

Macadam,  39,  308 .  02  sq.  yd  ....  at       .75  29,481 .  01 

$137,090.93 

Valves,  Pits  and  Drips: 

Drips,  at  $.027  per  lb $     3,936.20 

Valves  (at  manufacturers'  quoted  prices)..  889.90 

Pits  (at  estimated  prices) 186.93 

$     5,015.03 

Net  cost,  Acct.  No.  231 .$647,591 .  69 

Taken  as $647,592.00 


310 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT  NO.  17 

Case  No.  1273 
Appraisal  of  Kings  County  Lighting  Company 
Net  Cost 
Trunk  Lines  and  Mains 
Development  Item 

Acct.  No.  231 
Mains: 
18,013  ft.  8-in.  main at -$    .876  $15,779.39 

Pavement: 

Asphalt,  4,952 .  01  sq.  yd at  $3 .  00  .$14,856 .  03 

Granite,  62 .  80  sq.  yd at       .50  31 .  40  14,887 .  43 

Net  cost,  development  item,  Acct.  No.  231 $30,666.82 

Note. — Inasmuch  as  the  items  mentioned  on  this  page  are  not  now  in  use 
by  the  company,  their  net  cost  has  not  been  included  in  the  total  net  cost  of 
the  property.  Since  they  are  regarded  as  assets  of  the  company,  however, 
their  present  value  is  included  in  the  total  present  value  of  the  property, 
and  their  net  cost  is  shown  here  in  order  that  a  proper  comparison  may  be 
made. 


EXHIBIT  NO.   17 

Case  No.  1273 
Appraisal  of  Kings  County  Lighting  Company 

Net  cost 
Trunk  Lines  and  Mains 
Cost  per  Trench  Foot  of  Gas  Mains  Installed 
Wrought  Iron 


Acct.  No.  231 


Sizes 

1  in. 

IJin. 

liin. 

2  in. 

6  in. 

Sin. 

10  in. 

■  Depth,  ft 

Width,  ft 

Excavation  <    „         , 

Cu.  yds 

Cost  per  cu.  yd. 

Excavation .... 

Cost    per  J   Laying 

trench  foot  1  Pipe 

Haul 

2.7 
1.5 

.15 

.85 

.128 
.002 
.0388 
.001 

2.7 
1.5 

.15 

.85 

.128 
.002 
.0529 
.001 

2.8 
1.5 
.16 

.85 

.136 
.002 
.0634 
.001 

2.8 
1.5 

.16 

.85 

.136 
.002 
.0846 
.002 

1 
3.4        3.4 
2.0        2.0 

.25  1      .25 

.85  !      .85 

I 

.213       .213 
.035       .035 
.487       .914 
.013       .013 

3.6 

2.0 
.27 
.85 

.23 

.04 

1.377 

.019 

Total 

.1698       .1839 

.2024 

.2246 

.748    1.175      1.666 

APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     311 


Cost  Per  Trench  Foot  of  Gas  Mains  Installed — {Continuect) 
Cast  Iron 


Sizes 

3  in. 

4  in. 

6  in. 

8  in. 

10  in. 

12  in. 

16  in. 

20  in. 

24.  in. 

r  Depth,  ft.  .  . 

2.9 

3.0 

3.3 

3.6 

3.7 

3.9 

4.2 

4.6 

5.1 

Width,  ft...  . 

1.5 

1.5 

1.5 

2.0 

2.0 

2.0 

2.5 

2.5 

3.0 

Excavation  ■ 

Cu.  yds 

.16 

.17 

.185 

.27 

.28 

.29 

.39 

.425 

.57 

Cost  per  cu. 

.85 

.85 

.85 

.85 

.85 

.85 

.85 

.85 

.85 

i    yd. 

Excavation  . 

.136 

.145 

.158 

.23 

.238 

.247 

.332 

.362  '    .485 

La>-ing 

.014 

.019 

.028 

.035 

.044 

.054 

.077 

.128       .209 

Cost    per 

Lead 

.025 

.033 

.05 

.065 

.083 

.092 

.117 

.15         .18 

trench  foot 

Yam 

.001 

.001 

.002 

.002 

.003 

.003 

.004 

.005       .007 

Pipe 

.134 

.21 

.35 

.526 

.725 

.924 

1.46 

2.08      2.72 

[  Haul 

.005 

.007 

.012 

.018 

.025 

.032 

.05 

.071       .093 

Total 

.315 

.415 

.600 

.876  1.118 

1.352 

2.040 

2.796    3.694 

EXHIBIT  NO.   17 

Case  No.  1273 

Appraisal  of  Kings  County  Lighting  Company 

Net  Cost 

Services — Unit  Prices 

Acct.  No.  232 
Based  on  observation  of  costs  of  labor  and  material,  shown  in 
company's  records,  the  average  cost  of  fittings  per  service, 

was  foimd  to  be $0 .  35 

On  the  same  basis,  the  average  cost  of  labor,  per  foot  of  ser\'ice, 

was  found  to  be .'?0. 07640 

The  cost  of  hauling  was  estimated  at 0.00178 

Making  total  labor  cost,  per  foot  of  service $0.07818 

Taken  as .$0.0782 


312 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT  NO.  17 

Case  No.  1273 
Appraisal  of  Kings  County  Lighting  Company 
Net  Cost 
Gas  Meters 


Maker 


Size 


Number 


Goodwin 

Goodwin 

Goodwin 

Goodwin 

Goodwin 

Good'tt'in 

Goodwin 

Goodwin 

A.M.  Co 

A.M.  Co 

A.  M.  Co 

A.M.  Co 

A.M.  Co 

A.M.  Co 

A.  M.  Co 

A.M.  Co 

A.M.  Co 

Reeves 

U.  S.  M.  Co 

N.  Y.  Imp.  M.  Co 


3  Light 

5  Light 

10  Light 

20  Light 

30  Light 

45  Light 

60  Light 

100  Light 

3  Light 

5  Light 

10  Light 

20  Light 

30  Light 

45  Light 

60  Light 

100  Light 

200  Light 

5  Light 

5  Light 

5  Light 


431 

156 

22 

17 

2 

5 

7 

3 

3,010 

16,294 

76 

78 

39 

21 

15 

13 

2 

1 


20,197 


Net  cost  Acct.  No.  233 . 
Taken  as 


Unit  cost 


Acct.  No.  233 


5.25 

$     2,262.76 

6.30 

962.80 

8.75 

192 . 50 

12.60 

214.20 

19.25 

38.50 

29.40 

147.00 

38.50 

296.50 

61.25 

183.75 

125.25 

15,802.50 

6.30 

102,652.20 

8.75 

682.50 

12.60 

982.80 

19.25 

750.75 

29.40 

617.40 

38.50 

577.50 

61.25 

796.25 

125.50 

251.00 

6.30 

6.30 

6.30 

6.30 

6. 30 

12.60 

$127,429.10 
$127,429.00 


EXHIBIT  NO.  17 

Case  No.  1273 

Appraisal  of  Kings  County  Lighting  Co.\ip.\ny 

Net  Cost 

Gas  Meter  Installation 

Acct.  234 

In.stallation  of  19,631  gas  meters  at  $1.25 .$24,538.75 

Taken  as * $24,539.00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     313 


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314  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  NO.  29 

Public  Service  Commission,  New  York,  First  District 
KINGS  COUNTY  LIGHT  COMPANY 

Case   No.  1273 

Introduced  by  Wm.  A.  Baehr 

Mains,  Excavation  for 


Size 

Trench 

Cross-sectional 
area  in  sq.  ft. 

Cubic  yards  per 

lineal  foot  of 

trecich 

Width 

Depth 

3" 

1'8" 

3'  6" 

5.83 

.216 

4" 

I'S" 

3' 6" 

5.83 

.216 

6" 

1'  10" 

3' 8" 

6.74 

.250 

8" 

2'0" 

3'  10" 

7.67 

.284 

10" 

2' 4" 

4'  0" 

9.33 

.346 

12" 

2' 6" 

4'  2" 

10.40 

.385 

16" 

2'  10" 

4'  6" 

12.75 

.472 

20" 

3'  2" 

4'  10" 

15.30 

..566 

24" 

3' 6" 

5'  2" 

18.10 

.670 

Mains,  Cast  Iron 


Trench 

Size 

Width  per 

length 

Add 
2  per  cent. 

Weight  per 

foot  used 

Width 

Depth 

3" 

180  lb. 

183.6  1b. 

15.3  lb. 

1'8" 

3' 6" 

4" 

228  lb. 

232.6  1b. 

19.4  1b. 

1'8" 

3' 6" 

6" 

360  lb. 

367.2  lb. 

30.6  1b. 

1'  10" 

3'  8" 

8" 

504  lb. 

514.1  lb. 

42.8  1b. 

2'0" 

3'  10" 

10" 

670  lb. 

683.4  lb. 

.56.9  lb. 

2'  4" 

4'  0" 

12" 

870  lb. 

887.4  1b. 

74.0  lb. 

2' 6" 

4'  2" 

16" 

1,300  lb. 

1,326.0  1b. 

110.5  lb. 

2'  10" 

4'  6" 

20" 

1,800  lb. 

1,836.0  lb. 

1.53.0  1b. 

3' 2" 

4'  10" 

24" 

2,450  lb. 

2,499.0  1b. 

208.3  lb. 

3' 6" 

5' 2" 

Weight  includes  bells;  2  per  cent,  is  added  for  overweight. 
Average  cover  is  figured  at  3  ft. 

Excavation,  back-filling  and  hauling  excess  dirt  at  $0.75  per 
cubic  yard. 


f 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     315 

Cartage  at  $2.00  per  ton  average  all  kinds  of  material  on  as 
much  of  material  as  would  be  handled  twice. 
For  specials  add  4  per  cent,  of  cost  of  pipe. 


Mains,  Cast  Iron 


Size 

Cost  of 
pipe 

Cartage  at 

S2.00  per 

ton 

Labor 
laying 

Excavation, 
back-filling 
and  hauling 

Joint 
material 

Specials 

Totals 

3" 

SO. 219 

SO. 015 

SO. 020 

SO. 162 

SO. 020 

$.009 

$0.45 

4" 

0.278 

0.019 

0.020 

0.162 

0.026 

.011 

0.52 

6" 

0.438 

0.031 

0.040 

0.188 

0.035 

.018 

0.75 

8" 

0.612 

0.043 

0.050 

0.213 

0.044 

.024 

0.99 

10" 

0.814 

0.057 

0.060 

0.260 

0.061 

.033 

1.29 

12" 

1.060 

0.074 

0.080 

0.288 

0.074 

.042 

1.62 

16" 

1.581 

0.111 

0.160 

0.354 

0.109 

.063 

2.. 38 

20" 

2.189 

0.153 

0.250 

0.425 

0.152 

.083 

3.25 

24" 

2.981 

0.208 

0.400 

0.502 

0.215 

.119 

4.43 

Cast  Iron  Pipe  Prices 

Price  f.  o.  b.  cars  per  ton $27.00 

6  per  cent,  store-room  expense  1 .  62 

Total  per  ton $28.62 


316 


VALUATION  OF  PUBLIC  UTILITIES 


1 

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l4 

6  per  cent. 
S.  R.  ex- 
pense on 
pipe  and 
fittings 

^    ^     30    CO 
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O    O    O    O 
O   O   O   O 

m 

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tings, 
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tion per 
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t-(     T-H      T-H      (M 

APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     317 

Lead  Joints 


Size 

Weight,  lead 

Weight,  yarn 

Cost  per  joint 

Cost  per  foot 

3" 

4.5  1b. 

.25  1b. 

$.238 

$0.20 

4" 

6  1b. 

.25  1b. 

.313 

0.026 

6" 

8  1b. 

.40  1b. 

.421 

0.035 

8" 

10  1b. 

.50  1b. 

.526 

0.044 

10" 

14  1b. 

.  60  lb. 

.732 

0.061 

12" 

17  lb. 

.  80  lb. 

.892 

0.742 

16" 

25  lb. 

1.00  lb. 

1.203 

1.09 

20" 

35  lb. 

1 .  30  lb. 

1.819 

1.52 

24" 

50  lb. 

1.75  1b. 

2.593 

2.15 

Cost  of  Material 

Lead 5c  at  the  work 

Yarn 5 .  3c  at  the  work 

Paving  in  Street 

Repaying: 

1.  Granite  block  on  sand  and  portion  concrete 

base — waste  and  labor,  etc.,  only $1 .00  per   sq.  yd. 

2.  Asphalt  on  concrete  base 3 .  00  per  sq.  yd. 

3.  Vitrified  brick  on  edge 2 .  60  per   sq.  yd. 

4.  Common  brick  on  edge 1 .  50  per   sq.  yd. 

5.  Macadam 75  per  sq.  yd. 

6.  Granite  block  on  sand-base,  laid 2.50  per   sq.  yd. 


The  foregoing  prices  are  based  on  a  paving  contractor  fur- 
nishing all  tools,  machinery,  labor,  and  material  necessary  for 
relaying  pavement  in  trenches  to  be  excavated  and  back-filled 
by  the  gas  company  to  the  sub-grade  of  the  pavement  in  place. 

The  prices  are  based  on  the  assumption  that  men  taking  up 
the  pavement  will  not  cover  concrete,  brick,  and  cushion  sand 
which  has  been  removed  from  the  pavement,  with  the  excavated 
earth,  and  will  leave  them  convenient  for  replacing  in  the  pave- 
ment. Also  that  in  removing  pavement  with  sand,  pitch  or 
asphalt  filler,  the  men  will  not  destroy  more  than  10  per  cent, 
of  the  brick.  To  these  figures  add  cost  of  cutting  through 
pavement. 


318  VALUATION  OF  PUBLIC  UTILITIES 

Paving 

Square  yards  of  paving  per  trench  foot  for  different  sizes  of 
pipe  and  kinds  of  paving. 

Size         Asphalt         Granite  Brick  Belgian  block       Macadam 


3" 

.243       1 

.278 

.333 

.259 

.185 

4" 

.243 

.278 

.333 

.259 

.185 

6" 

.259 

.300 

.351 

.278 

.204 

8" 

.278 

.315 

.370 

.296 

.222 

10" 

.315 

.351 

.408 

.333 

.259 

12" 

.333 

.370 

.426 

.352 

.278 

16" 

.370 

.408 

.462 

.389 

.315 

20" 

.408       ' 

.444 

.500 

.426 

.351 

24" 

.444       ! 

.482 

.538 

.463 

.389 

The  above  figures  are  based  on  overcuts  on  paving  as  follows: 

Asphalt 6"     Macadam 0"      . 

Belgian  block 8"     Granite 10" 

Brick 16" 

Add  cost  of  cutting  through  pavement  to  cost  per  trench  foot 
as  obtained  from  above. 

Paving  Over  Services 

Average  width  of  paving  cut  is  2  ft.  plus  overcuts  in  trenches 
as  follows: 

Asphalt 6" 

Brick 16" 

Granite 10" 

Belgian  block 8" 

Macadam 0" 

Length   of   paving   over   services   is   taken   from   company's 
records. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     319 


I 


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Total  cost  of 
paving  per 
trench  foot 

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through  paving 
per  trench  foot 

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o  o  o  o  o 
d     '     "     "     ' 

Cost  of 

repaving 

per  trench 

foot 

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Sq.  yds. 

of  paving  cut 

per  trench 

foot 

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t^    t^    i-H    OS    (M 

(N    CO    CO    (N    IM 

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paving  cut 

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Overcut 

allowed  on 

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trench 

CO  ^  o  Tt<  b 

Kind  of  paving 

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320 


VALUATION  OF  PUBLIC  UTILITIES 


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APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     321 

Lamp  Services 
Not  including  paving 


Six 

per  cent. 

Labor, 

Excava- 

Size 

Pipe 

Fittings 

Riser 

store- 
room 
expense 

Cartage 

laying  and 
tapping 

tion  back- 
filling 

Total 

J" 

0.55 

0.07 

0.42 

SO.  06 

SO.  10 

S3. 00 

$2.91 

$7.11 

1  " 

0.80 

0.10 

0.42 

0.08 

0.10 

3.05 

2.91 

7.46 

U" 

1.09 

0.13 

0.42 

0.10 

0.10 

3.10 

2.91 

7.85 

Average  lamp  service  taken  as  21  ft.  long. 
Average  riser  taken  as  11  ft.  of  1  in.  pipe. 
Cartage,  excavation  and  cost  of  fittings  taken  on  same  basis  as  on  house  services. 


EXHIBITS  "A,"  ''B,"  "C"  AND  ''D" 

Public  Service  Commission,  New  York,  First  District 

KINGS  COUNTY  LIGHTING  COMPANY 

Case  No.  1273 

Introduced  by  Wm.  W.  Randolph 

(As  of  December  13,  1910) 

Summary 


Cost 
new 

Exhibit  "A"— Buildings $    310,800.00 

Exhibit  "  B  "—Machinery 649,398 .  00 

Exhibit  "C"— Real  Estate 969,424.00 

Exhibit  "D" — Distribution  System: 

(1)  Mains 1,292,580.00 

(2)  Consumers'  Services 398,184.00 

(3)  Lamp  Services 65,940 .  00 

(4)  Consumers'  Meters 209,244.00 

Working  Capital 150,000 .  00 

Cost  to  develop  sales  of  gas  to  private  con- 
sumers from  zero  to  over  507,000,000  cu. 

ft.,  annually 600,000 . 00 


Deferred 
repairs 
9,480.00 

33,798.00 


129,264.00 
79,632.00 
21,984.00 
35,400.00 


21 


Cost 

Deferred 

new 

repairs 

16.100.00 

$    450.00 

322  VALUATION  OF  PUBLIC  UTILITIES 

EXHIBIT  "A" 

BUILDINGS 

Generator  House  No.  1 S 

52'8"X50'2"X33'0"  ground  floor  to  truss 
chord,  two  story  building,  brick  walls,  gable 
roof  monitor  type  corrugated  iron  on  steel 
on  steel  trusses.  Including  machinery 
foundations.  Also  included  with  this  build- 
ing is  the  runway  between  No.  1  and  No.  2 
houses. 

Generator  House  No.  2 41,000.00  600.00 

95'6"X53'0"X48'11"  ground  floor  to  truss 

chord,  two  story  building,  brick  walls,  gable 

roof 'monitor  type  slate  on  steel  on  steel 

trusses.     Including  machinery  foundations. 

Also  included  with  this  building  is  pit  partly 

under  Generator  House  No.  2  and  partly 

under  Wash  Room. 
Boiler  House,  Engine  House,  Exhauster  House, 

Tar  Tank  House  and  Condenser  House 45,900 .  00  700 .  00 

Boiler  House,  53'1"X42'0"X  16'8"  ground 
floor  to  truss  chord,  one  story  building, 
brick  walls,  gable  roof  corrugated  iron  on 
steel  on  steel  trusses.  Including  machinery 
foundations. 

Engine  and  Exhauster  House,  50'4"x41'0" 
a  25'6"  ground  floor  to  truss  chord,  two 
story  building,  brick  walls,  gable  roof  slate 
on  wood  on  wood  trusses.  Including 
machinery  foundations. 
Tar  Tower  House,  43'0"  X  26'4"  X  89'0"  bot- 
tom of  settUng  wall  to  eaves,  three  story 
building,  brick  walls,  peaked  roof  slate  on 
wood.  Including  machinery  foundations. 
Also  included  -R-ith  this  building  are  the  tar 
wells  under  it. 

Condenser  House,  44'4"X41'0"X24'2" 
ground  floor  to  truss  chord,  two  story  build- 
ing, brick  walls,  gable  roof,  slate  on  wood  on 
wood  trusses.  Including  machinery  foun- 
dations. 

Purifier  House: $  14,400.00        $    400.00 

67'4"X49'4"X27'0"  ground  floor  to  truss 
chord,  two  story  building,  brick  walls,  gable 
roof  monitor  type  slate  on  wood  on  steel, 
trusses. 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     323 

Cost  Deferred 

BUILDINGS  (Cont'd)  new  repairs 

Repair  Shop  and  Stable: 12,300.00  300.00 

67'0"X41'0"X22'6"  high  ground  floor  to 
truss  chord,  two  story  building,  brick  walls, 
gable  roof,  slate  on  wood  on  wood  trusses. 

Office  and  Meter  House: 17,900.00  600.00 

40'0"X44'0"X37'10"  ground  floor  to  truss 
chord,  three  story  building,  brick  walls, 
gable  roof  slate  on  wood  on  wood  trusses. 
Including  machinery  foundations. 

Coal  Shed: 62,500.00  1,900.00 

108'2"X52'0"X52'7"  brick  floor  to  eaves, 
steel  and  wood  construction,  roof  monitor 
type  tar  and  gravel  on  wood.  This  building 
includes  runways  from  coal  shed  to  Houses 
No.  1  and  No.  2. 

Coal  Tower  House  on  Dock: 

Included  with  coal  handUng  machinery. 

Artesian  Well  House: 2.100.00  50.00 

14'0"X14'0"X22'0"  basement  floor  to 
eaves,  brick  walls,  roof  slate  on  wood,  gable 
type. 

Men's  Room  House  (Wash  Room) $     4,800 .  00        $    150 .  00 

30'8"X3r2"x24'3"  ground  floor  to  truss 
chord,  two  story  building,  brick  walls,  roof 
tar  and  gravel  on  wood. 

Valve  and  Boiler  House  at  Holder  Station : . .  .  .  7,200 .  00  250 .  00 

65'2"X27'0"X14'0"  boiler  house  floor  to 
truss  chord;  23'4"  valve  house  from  base- 
ment floor  to  truss  chord.  Brick  walls, 
roof  (large  ventilator)  part  slate  on  wood, 
part  tin  on  wood.  Including  machinery 
foundations. 

Dock  (Pier): 

Frame  construction,  582'6"  long 24,800 .  00  2,000 .  00 

Fences  and  Paving: 10,000  00  500.00 

.$259,000.00  $7,900.00 

20  per  cent.  Overhead  Charges 51,800 .  00  1,580.00 

Total  Buildings S310.S00.00  §9,480.00 


324 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT 
MACHINERY 


B" 


Cost 
new 


Deferred 
repairs 


Genekating  Apparatus: 

Three  8'  6"  Lowe  water  gas  sets  to  the  outlet 
of  washer,  with  8'  6"  diameter.  Generators ' 
and  8'  0"  dia.  carburetters  and  superheaters. 
Two  located  in  generator  house  No.  1,  and 

one  in  generator  house  No.  2 §29,700.00 

One  Williamson  set  of  water  gas  apparatus. 
Diameter  of  generator  12',  diameter  of  su- 
perimposed t'win  carburetter  and  super- 
heater 14',  total  height  46'  4" 22.000 .  00 

Boilers: 

Four  106  H.  P.  Babcock  &  Wilcox  boilers, 
water  tube,  including  boiler  room  piping  and 
two    steel    stacks    39"    dia.  X 120'     high. 

Located  in  boiler  room 

One  215  H.  P.  Babcock  &  Wilcox  water  tube 
boiler,  including  boiler  room  piping  and  one 
steel  stack  39"  dia.  X  122'  6"  high.    Located 

in  boiler  room 

One  90  H.  P.  vertical  tubular  boiler  includ- 
ing steel  stack  2'  0"  dia.  X  40'  0"  Iiigh.  Lo- 
cated in  Hopper  House  on  dock.    Included 

with  coal  handUng  machinery 

One  50  H.  P.  vertical  tubular  boiler  includ- 
ing steel  stack  20"  dia.  X  25'  high.  Located 
in  valve  house  at  the  65th  Street  Holder 

Station 

One  100  H.  P.  horizontal  tubular  boiler  in- 
cluding steel  stack  30"  dia.  X  65'  high. 
Located  in  valve  house  at  the  65th  Street 
Holder  Station 


S2,000.00 


Scrubbers: 

One    primary   scrubber    4'X7'X20'    high. 

Located  in  generator  house  No.  2 

One  shaving  scrubber  10'  dia.X27'9"  high, 
including  foundation.  Located  in  }-ard .... 
One  shaving  scrubber  10'  dia.  X  25'  high, 
including  foundation.  Located  in  yard .... 
Two  scrubbers  7'  dia.  X  22'  1"  high,  includ- 
ing foundation.     Located  in  j^ard 

Condensers: 

Two  condensers  7'  dia.  X  22'  1"  high,  includ- 
ing foundations.     Located  in  yard 

Two  condensers  7'  dia.  X  22'  1"  high. 
Located  in  condenser  room . 


18,680.00  2,500.00 


roo.oo 


2,090.00 


100.00 


100.00 


S770.00 

$75.00 

3,000.00 

100.00 

2,500.00 

•  100.00 

4,620.00 

200.00 

6,820.00 

1,000.00 

5,280.00 

1,000.00 

APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     325 

Cost  Deferred 

new  repairs 

Tar  and  Ammonia  Extractors: 

One  P.  &  A.  tar  extractor  with  16"  con- 
nections.    Located  in  tar  house 2,200 .  00  1,000 .  00 

One  standard  rotary  washer  scrubber 
7'  dia.  Xl2'  Sh"  long.  Located  in  con- 
denser house. .  ." 4,180.00  500.00 

Purifiers: 

Four  purifiers  16'X24'X7'  6"  deep.  Lo- 
cated in  purifier  house 20,350.00  1,000.00 

Holders: 

One  reUef  holder  in  steel  tank,  capacity 
100,000  cu.  ft.,  including  foundation.  Lo- 
cated in  yard $18,600.00  .$500.00 

One  storage  holder  in  steel  tank  capacity 
100,000  cu.  ft.,  including  foundation.  Lo- 
cated in  yard 19,000.00  1,000.00 

One  storage  holder  in  steel  tank,  capacity 
500,000  cu.  ft.,  including  foundation.  Lo- 
cated at  65th  St'reet  Holder  Station 53,700 .  00  2,000 .  00 

One  storage  holder  in  steel  tank,  capacity 
2,000,000  cu.  ft.,  including  foundation. 
Located  at  65th  Street  Holder  Station 175,500.00  3,500.00 

Exhausters  and  Blowers: 

One  No.  10  Roots  exhauster  and  one  13"  X 
12"  direct  connected  N.  Y.  safety  vertical 

engine.     Located  in  condenser  room 3,300.00  150.00 

One  No.  8  Roots  exhauster  and  one  10"  X  12" 
direct  connected  N.  Y.  safety  vertical  en- 
gine.    Located  in  engine  room 1,850.00  100.00 

Two  No.  6  Roots  exhausters  and  two  7"  X  9" 

direct    connected    Oil    City    Boiler    Works 

Vertical  Engines.    Located  in  engine  room .  2,680.00  300.00 

Two  No.  11  Buffalo  Forge  Blowers  and  two 

13"  X  12"  Sturtevant  engines,  double  belted. 

Located  in  engine  room 4,840.00  250.00 

One  N.  Y.  blower  and  one  90  H.  P.  Terry 
Turbine  direct  connected,  including  6i"X 
12"X12"     Smith- Vaile    condenser    pump. 

Located  in  Generator  House  No.  2 $3,020.00     

One  shaving  blower  and  one  6"X6"  Stur- 
tevant Vertical  Engine  (belted).  Located 
in  loft  over  stable.     Including  piping,  etc., 

to  sha\ang  blower 820 .00     

One  Turbo  blower  15"  dia.  connected  to 

Spencer  Damper  Regulator.     Installed  on      

boilers  Nos.  1  and  2.     Included  with  boilers. 


326 


VALUATION  OF  PUBLIC  UTILITIES 


Cost 
new 


Deferred 
repairs 


Pumps: 

Two  6"X4"  Worthington  duplex  pumps. 

Located  in  boiler  room 

One  7"X7"X13"  Cameron  simplex  pump. 

Located  in  basement  of  engine  room 

One  6"X5f"X6"  Worthington  duplex 
pump.     Located    in    basement    of    engine 

room 

One  10"Xl0i"Xl8"  Cameron  simplex 
pump.  Located  in  Hopper  house  in  dock .  . 
One  7i"X6"XlO"  Worthington  duplex 
pump.  Located  in  Artesian  well  house.  .  . 
One  5"X4"X8"  Davidson  simplex  pump. 
Located  in  basement  of  the  engine  room.  .  . 
One  6"X3"X7"  Cameron  simplex  pump. 
Located  in  basement  of  the  engine  room .  .  . 
Two  4J"x2f"X4"  Worthington  duplex 
pumps.     Located   in    basement    of   engine 

room 

Two     6"Xo|"x6"     Worthington     duplex 

pumps.     Located  in  tar  house 

One  6"X3"X7"  Cameron  simplex  pump. 
Located  in  valve  room  65th  Street  Holder 

Station 

Physical  decay  on  all  the  above  pumps. . . . 
One  Smith- Vaile  jet  condenser  pump.  In- 
cluded with  blower  and  turbine  unit. 

Station  Meters: 

One  ll'3"Xir3"  station  meter  located  in 

office  building 

One  equitable  proportional  meter  with  16" 
connections.     Located    in    office  building. 

Capacity  150,000  cu.  ft.  per  hour 

One  Westinghouse  air  meter  No.  12,  located 
in  the  engine  room 

Elevators: 

One   steam   hydrauHc   elevator,    located 

in  Generator  House  No.  2 

One  steam  hydraulic  elevator,  located  in 

purif  j'ing  house 

One   elevator   with   crane   engine  hoist, 
located  in  generator  house  No.  1 


$250 .00     $ . 
350 . 00 

160.00 
690.00 
270.00 
130.00 
140.00 

.  105.00 
320 . 00 


140.00 


250.00 


5,170.00  1,000  00 

1,200.00                50.00 
80.00  


3.330.00  400.00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     327 


Scales: 

One  six-ton  wagon  scale.     Located  outside 

office  building.     Including  pit,  etc 

One  four-ton  platform  scale.     Located  in 

coal  shed 

One  four-ton  track  scale.  Located  in 
hopper  house  on  dock.  Included  with 
coal  handling  machinery. 

Coal  Handling  Apparatus: 

One  grab  bucket  hoist  and  cableway  com- 
plete, consisting  of  steel  mast  and  gaff, 
clamshell  bucket,  drum  hoist  with  617'  of 
steel  trestle  and  double  cable  tracks  includ- 
ing 4  three-ton  cars,  located  on  dock. 
Also  included  with  this  is  hopper  house  on 
Dock  R.  R.,  track  scales,  engines  and  90 
H.  P.  boiler 

Coal  Buggies: 

Four  side  drop   cars,    2000   lbs.    capacity. 

Located  in  generator  house  No.  2 

Two   side   drop   cars,    1000   lbs.    capacity. 

Located  in  generator  house  Xo.  2 

Two  two-wheel  coal  buggies.  Located  in 
generator  house  Xo.   1 

Shops: 

Machine  shop  equipment 

Blacksmith  shop  equipment 

Carpenter  shop  equipment [ 

Meter  shop  equipment J 

Laboratory  equipment 

Tanks,  Wells,  etc. 

One  steel  oil  tank  15'  dia.  Xl5'  high, 
capacity  20,386  gals.  Including  founda- 
tion.    Located  in  the  yard 

One  steel  oil  tank  35'  dia.  X  35'  high.  In- 
cluding    foundation.      Capacity      251,881 

gals.    Located  in  the  yard 

One  steel  well  water  tank  13'  dia.  X  20'  high. 
Capacity    19,858     gals.      Located    in    tar 

tower 

Two  steel  tar  tanks  10'  dia.x6'  high. 
Capacity  each  3,500  gals.     Located  in  tar 

tower 

One  settUng  well  40'  dia.  X  12'  deep,  brick 
with  two  brick  partitions.  Capacitj' 
112,766  gals.     Located  in  j-ard 


Cost  Deferred 

new  repairs 

S500.00  $100.00 

160.00  


33.000.00 

2,000.00 

770.00 

100.00 

100.00 

100.00 

2,200  00  200.00 


1.100.00  150.00 


r50 . 00 


8,250.00 


550 . 00  500 . 00 


440.00 


4.400.00      J 


328 


VALUATION  OF  PUBLIC  UTILITIES 


Cost 
new 


Tanks,  Wells,  etc.  (Cont'd.) 

One  brick  tar  well  under  tar  house  32'6"X 
13'  X  14'.  Included  with  building.  Capac- 
ity 35,000  gals. 

One  brick  tar  well  under  tar  house  32'6"X 
14'.  Included  with  building.  Capacity 
18,000  gals. 

One  brick  tar  well  under  tar  house  23'  X  6'2" 
X 14'.  Included  with  building.  Capacity 
14,850  gals. 

Two  driven  pipe  wells  at  works 

One  driven  pipe  well  at  Holder  Station . . 

Miscellaneous  : 

One  feed  water  heater   1'6"  dia.X6'8" 
high,    Berryman  type.     Located  in  the 

boiler  room 

One  feed  water  heater  1'6"  dia.X4'  high, 
Berrj'man    tj'pe.     Located    in    the    tar 

tower 

Two  oil  heaters  2'  dia.  X  6'  high.  Berry- 
man  tvpe.     Located  in  generator  house 

No.  1^ 

One  Bristol  indicating  and  recording  pyrom- 
eter, located  in  the  office  and  connected 
to  the  Williamson  water  gas  apparatus. .  .  . 
One    3"    type    "G"    Worthington    water 

meter.     Located  in  office  basement 

One  1^"  Worthington  oil  meter.     Located 

in  tar  house 

One  incinerite  for  burning  refuse.     Located 

in  office  basement 

One  20"  Smith  &  Sayre  governor.  Lo- 
cated in   valve  room  65th   Street  Holder 

Station 

Gauges — Miscellaneous 

Yard    connections — piping,    valves,    valve 

boxes,  manholes,  etc 

Street  department  tools  and  tool  wagon.  .  . 
Rented  arc  lamps — 136  inside,  41  outside. . 

48th  Street  office  equipment  and \ 

48th  Street  shop  equipment / 

General  stable  equipment 


Deferred 
repairs 


1,100.00 


200.00 


550.00        S    190.00 


440 . 00 

120.00 

SO.  00 

20.00 

110.00 

530.00 

130.00 

550 . 00 

200.00 

55,000.00 

3,000 .  00 

.?        600.00 

S    100.00 

1,450.00 

150.00 

3,750.00 

450.00 

6,000.00 

1,500.00 

.S541,165.00      .S28,165.00 
20  per  cent,  overhead  charges 108,233.00  5,633.00 


Total  machinery -8649,398.00        33,798.00 


APPRAISALS  OF  PUBLIC  UTILITY  PROPERTIES     329 

EXHIBIT  "C" 

REAL  ESTATE  Value 

Real  Estate  at  Works: 

Located  at  55th  Street  and  First  Avenue, 
described  and  valued  by  David  Porter, 
Esq.,  on  pages  616  and  G32  of  minutes  of 
hearing  before  the  State  of  New  York 
Public  Service  Commission  for  the  First 
District,  in  case  Xo.  1273 472,680  sq.  ft.      $815,646.00 

Real  Estate  at  Holder  Station: 

Located  at  65th  Street  and  Ninth  Avenue, 

described  and  valued  by  David  Porter, 

Esq.,  on  pages  613,  614  and  615  of  minutes 

of  hearing  before  the  State  of  New  York 

Public  Serx-ice  Commission  for  the  First 

District,  in  case  No.  1273. 

Lots  No.  15  and  17  in  block  No.  5749.  126,270  sq.  ft.        126,270.00 

Lot  46  in  block  5742 25,685  sq.  ft.  11,167.00 

One  lot  in  block  5743 4,029  sq.  ft.  1,527.00 

One  lot  in  block  5750 10,120  sq.ft.  4,328.00 

Lot  No.  9  in  block  5764 2,435  sq.  ft.  1,186.00 

Lot  No.  28  in  block  5763 30,000  sq.  ft.  9,300 .  00 

David  Porter's  value  as  of  Decem- 
ber 31,  1910 1969,424.00 

(See  page  614  of  minutes.) 


330 


VALUATION  OF  PUBLIC  UTILITIES 


EXHIBIT  "D" 
Distribution  System.    Mains 


Size 

Kind  of  paving 

No.  of 

feet 

Rate  per 
foot 

Amount 

Total  amount 

1" 

Unimproved..  . 

Unimproved. .  . 

Asphalt 

Unimproved. . . 

Unimproved. .  . 

Asphalt 

Macadam 

Unimproved. . . 

Asphalt 

Granite 

Brick 

245 
364 

1     $    .25 

I          .28 

1.10 
.30 

.35 

l'      1.41 
.69 
.50 

1.70 

1.48 

1.95 

.89 

.91 

.70 

1.90 
1.68 
2.15 
1.09 
1.11 
.90 

$2.20 
1..37 
1.15 

1.50 

2.97 
2.05 
1.80 

3.03 
2.75 

$61.00 

$61.00 
102.00 

1,111.00 
967.00 

8,863.00 
311,101.00 

427,915.00 

$69,5.36.00 
164.00 

97,883.00 
21,096.00 

li'- 

102.00 

U".    ... 

290 
2,640 

319.00 
792.00 

2,930 

967.00 

O" 

2,764 

3" 

2,190 
2,488 
8,116 

3,088.00 
1,717.00 
4,058.00 

12J94 

66,956.00 

642.00 

7,728.00 

5,560.00 

73,830.00 

156,385.00 

4" 

39,386 

434 

3,963 

6,247 

81,132 

223,407 

Belgian  block. 

Macadam 

Unimproved. .  . 

Asphalt 

Granite 

Brick 

354,569 

141,140.00 

1,114.00 

2,685.00 

6,919.00 

108,892.00 

167,165.00 

6" 

74,284 

663 

1,249 

6,348 

98,101 

185,739 

Belgian  block. . 

Macadam 

Unimproved..  . 

Asphalt 

Macadam 

Unimproved. . . 

366,384 

$53,167.00 
7,880.00 
8,489.00 

8" 

24,167 
5,752 
7,382 

37,301 

164.00 

10" 

109 

Asphalt 

Macadam 

Unimproved. .  . 

Macadam 

Unimproved. . . 

12" 

6,371 
12,153 
30,026 

18,922.00 
24,914.00 
54,047.00 

48,550 

21,074.00 
22.00 

16" 

6,955 
8 

6,963 

1 

APPRAISALS  OF  PUBLIC   UTILITY  PROPERTIES     331 
Distribution  System.     Maixs — Continued 


Size 

Kind  of  pa\"ing 

Xo.  of 
feet 

Rate  per 
foot        , 

Amount 

Total  amount 

Deferred 
repairs 

20" 

Asphalt 

Macadam 

Unimproved. .  . 

Unimproved. . . 

3,688 

4,904 

726 

S4.98       i 
3.91        ' 
3.60 

1 
4.50 

$18,366.00 

19,175.00 

2,614.00 

$40,1.55.00 
275.00 

9,318 

275.00 

24" 

61 

10  per  cent 

20%  overhe 
Total    main 

G.  C.  P.... 
id  charges .  . 

$979,229.00 
97,921.00 

31,077,150.00 
215,430.00 

$107,720.00 
21,544.00 

$1,292,580.00 

129,264.00 

Consumers'  Services 


Size 

No.  of  services    '  Rat 

es  per  service 

Amount 

Deferred  repairs 

1  " 

184 
5,075 
7,346           ' 

132 
14 

$21.50 
23.50 
23.70 
28.50 
41.00 

charges 

S     3,956.00 

119,262.00 

174,100.00 

3,762.00 

574.00 

li" 

1*" 

Q    " 

3  " 

10 
20 

12,751 
per  cent.  G.  C.  P .  . 

per  cent,  overhead 

$301,654.00 
30.166.00 

$331,820.00 
66,364.00 

$66,360.00 
13,272.00 

Total  consumers'  services. 


$.398,184.00 


$  79,632.00 


332 


Size 


VALUATION  OF  PUBLIC  UTILITIES 
Lamp  Services 


No.  of  services         Rate  per  ser\'ice 


Amount 


Deferred  repairs 


4,705 


SIO.OO 
11.00 
12.00 

10  percent.  G.C.P. 


20  per  cent,  overhead  charges. 
Total  lamp  services 


$25,050.00 

16,500.00 

8,400.00 


$49,950.00 
5,000.00 


854,950.00 
10,990.00 


$65,940.00 


$18,320.00 
3,664.00 


$21,984.00 


Consumers'  Meters 


Size 

No.  of  meters 

Rate  per  meter 

Amount 

Deferred  repairs 

3  Lt 

3,246 

16,135 

95 

92 

$5.55 
6.50 
9.10 

i5>  fin 

$18,015.00 
104,878.00 
865.00 
1,159.00     . 
745.00 
720.00 
666.00 
798.00 
2.34.00 

10  Lt 

20  Lt 

30  Lt 

39            I              19.10 
25           i             28.80 
18                         37.00 
14                         .57.00 
0           '           1 1 7  nn 

45  Lt 

60  Lt 

100  Lt. 
200  Lt. 

19,666 
Installing  19,666 
2,099  meter  locks 

§128,080.00 

29,499.00 

945.00 

meters  at  $1.50  .  . 

10  per  cent.  G.  C.  P 

20  per  cent,  overhead  charges 

$158,524.00 
15,846.00 

.       $174,370.00 
34,874.00 

829,500.00 
5,900.00 

Total  consumers' 

meters 

$209,244.00 

$35,400,00 

CHAPTER  X 
EXAMPLES  OF  IMPORTANT  APPRAISALS 

Street  Railway  Properties  in  Chicago. — The  former  controversy 
between  the  traction  companies  in  Chicago  and  the  local  author- 
ities resulting  in  the  present  satisfactory  relations  have  formed 
one  of  the  most  notable  developments  in  public  utility  history. 
In  1905  there  were  several  different  companies  operating  in  Chi- 
cago, with  franchises  in  certain  streets  expired  or  about  to  expire, 
and,  in  consequence,  the  physical  properties  had  been  allowed 
to  deteriorate  to  a  marked  degree.  The  city  authorities  were 
refusing  to  grant  new  franchises  without  additional  concessions 
from  the  corporations  so  that  the  service  was  all  but  disgraceful. 
In  this  situation  a  "Traction  Commission"  of  three  engineers, 
Messrs.  Bion  J.  Arnold,  Mortimer  E.  Cooley  and  A.  B.  du  Pont, 
were  appointed  ''to  consider  the  detailed  inventories  and  esti- 
mates of  value  to  be  submitted  by  the  Street  Railway  Companies, 
to  investigate  the  same  and  to  ascertain  whether  the  values  thus 
listed  were  reasonable,  fair  and  just." 

The  Commission  not  satisfied  with  the  inventories  and  values 
prepared  and  submitted  by  the  Street  Railway  Companies, 
employed  much  of  the  office  and  field  organization  of  the  Arnold 
Company,  supplementing  this  force  with  its  own  employees,  for 
the  purpose  of  making  an  independent  appraisal  of  the  Street 
Railway  properties.  Complete  examination  of  the  physical 
properties  was  made  during  1906  of  the  Chicago  Union  Traction 
Company's  and  the  Chicago  Cit}'  Railway  Company's  Properties. 
The  result  of  these  appraisals  showing  the  cost  to  reproduce  new, 
the  depreciation  determined  in  the  main  from  field  measurements, 
present  value,  and  in  addition  diagrams  for  each  piece  of  special- 
work  both  in  track  and  overhead  construction  together  with 
complete  inventory  of  parts  and  unit  prices,  was  published  in 
book  form,  one  relating  to  each  company,  as  a  report  of  the  work 
of  the  Commission. 

The  appraisals  attempted  to  evaluate  not  only  the  physical 
l^roperty  useful  in  serving  the  public  but  also  unused  but  still 

333 


334  VALUATION  OF  PUBLIC  UTILITIES 

existing  cable  systems  as  well  as  intangible  values  attaching  to 
good  will,  going  value  and  franchises. 

The  valuations  were  probably  more  full  and  precise  than 
anything  that  had  been  attempted  up  to  the  time  in  connection 
with  properties  of  such  size;  the  estimated  present  values  aggre- 
gating slightly  over  $50,000,000,  whereas  the  Companies  had 
claimed  a  valuation  of  over  S70,000,000. 

A  year  or  two  later  further  valuations  were  made  of  the 
South  Chicago  Railway  Company  and  the  Calumet  Electric 
Street  Railway  Company's  properties  along  the  same  lines  as 
followed  in  the  1906  appraisals.  The  reports  of  these  two 
appraisals  were  published  in  separate  books  which  also  give 
full  details  as  to  inventory,  unit  prices  and  final  values.  Again 
in  1910  the  Commission  submitted  another  report  as  to  the 
value  of  the  physical  property  of  the  Chicago  Consolidated 
Traction  Company  as  of  Nov.  1 ,  1909,  which,  w^hile  along  the  same 
lines  as  the  previous  valuations,  may  be  considered  as  embodying 
the  most  recent,  complete  and  approved  methods  adopted  by 
this  Commission  in  appraisal  work  as  the  result  of  a  large  ex- 
perience and  several  years  effort  in  this  particular  line.  On 
the  following  pages  are  given  typical  extracts  from  this  report 
as  showing  exactly  the  methods  followed  by  the  Traction 
Commission. 

In  all  the  valuations  made  by  the  Commission,  unit  prices 
were  determined  for  local  conditions  and  applied  to  the  quantities 
shown  in  the  inventory.  To  the  total,  thus  obtained,  percentages 
were  added  as  follows  to  cover  "organization,  engineering  and 
incidentals." 

To  Track  was  added  15  per  cent.  [  To  Buildings  was  added  15  per  cent. 

To   Electrical  Distribution   System  j  To  Paving  was  added  15  per  cent. 

was  added  15  per  cent.  j  To  Tools  was  added  0  per  cent. 

To  Rolling  Stock  was  added  5  per  I  To  Real  Estate.     The  figures  of  real 

cent.  I       estate  appraiser  were  taken  with- 

To    Power    Plant    Equipment    was  i       out  additions. 

added  10  per  cent.  ' 

In  the  case  of  the  Chicago  Consolidated  Traction  Company, 
the  amount  of  increase  by  the  use  of  the  above  percentages  w^as, 
in  even  figures,  $654,600.  That  is  an  average  of  13  per  cent, 
added  to  the  total  $5,056,000  obtained  from  the  inventory  by 
the  application  of  the  unit  prices  assumed,  as  related  to  the  prop- 


EXAMPLES  OF  IMPORTANT  APPRAISALS       335 

erty  aside  from  tools  and  real  estate  which  aggregated  Si 72,400, 
making  the  cost  of  reproduction  new,  as  covering  these  three 
items,  $5,882,987.40.  On  this  amount  5  per  cent,  additional 
was  allowed  for  "legal  expenses,  carrying  charges  and  contin- 
gencies," $294,149.37.  On  this  new  sum  total  of  $6,177,136.77 
an  additional  15  per  cent,  was  allowed  for  "conducting  the 
work,  furnishing  equipment  and  brokerage,"  $926,570.52,  mak- 
ing a  grand  total  of  $7,103,707.29  as  the  total  cost  of  repro- 
duction new.  From  these  figures  it  will  be  seen  that  to  the 
base  figures,  obtained  by  using  the  unit  prices  and  the  value 
of  tools  and  real  estate  without  additions,  namely  $5,288,406, 
there  was  added  by  the  use  of  the  various  percentages  shown 
$1,875,300,  that  is,  almost  exactly  36  per  cent,  in  order  to 
obtain  the  final  value  of  the  physical  property  without  any 
inclusion  of  franchise,  good  will  or  going  values.  Attention  is 
called  to  this  percentage  of  thirty-six  because  so  many  lay 
minds  unaccustomed  to  appraisal  work  and  the  necessity  for 
making  allowances  to  cover  the  installation  of  physical  property, 
aside  and  independent  of  the  contract  price,  overlook  this  neces- 
sary allowance  which  must  be  made  and  which  is  an  indivisable 
part  of  the  total  cost  of  construction. 

Among  the  many  and  interesting  points  to  be  settled  in 
connection  with  the  adjustment  of  difference  between  the  City 
and  the  Traction  Companies  were: 

(a)  The  basis  to  be  used  in  determining  the  value  of  the 
old  cable  road  systems.  This  matter  was  finally  adjusted  by 
allowing  the  value  of  those  cable  systems  which  the  companies  by 
ordinances  had  been  compelled  to  keep  in  condition  ready  for 
operation  and  on  the  other  hand  allowing  nothing  for  those  cable 
systems  which  were  entirely  obsolete  and  practically  abandoned. 

(6)  What  allowance,  if  any,  should  be  made  for  the  pave- 
ments laid  by  the  companies  on  their  right  of  way?  The  Com- 
mission submitted  figures  both  including  and  excluding  the 
value  of  pavement  without  specific  recommendation  as  to 
whether  same  should  be  allowed  in  the  valuation  of  the  prop- 
erty but  in  the  final  settlement  with  the  companies,  the  figure 
agreed  upon  included  paving. 

(c)  Good  will  or  going  value  was  considered  in  connection 
with  traffic  agreements  but  no  allowance  was  made  under  this 
head  on  the  ground  that  as  the  agreements  related  to  svstems 


336  VALUATION  OF  PUBLIC  UTILITIES 

which  were  co-operating,  the  value  of  such  contracts  was  not 
material  where  all  were  under  the  same  control. 

(d)  The  value  of  the  intangible  i^roperty  was  particularly 
complicated   owing  to  the  following  facts. 

"First. — The  difficulty  of  determining  what  are  the  exact  legal 
rights  of  the  companies  in  any  given  street  or  part  of  street,  in  absence 
of  a  direct  and  final  judicial  decision  as  to  these  rights; 

"Second. — The  difficulty  in  estimating  the  value  of  a  line  of  street 
railways,  consisting  of  several  parts,  where  each  of  these  i^arts  is  oper- 
ated under  a  different  tenure  due  to  the  character  of  the  ordinances  or 
franchises,  respectively;  and 

"  Third. — The  difficulties  arising  from  the  absence  of  exact  informa- 
tion as  to  the  receipts  and  expenditures  on  the  several  parts  of  a  single 
line  covered  by  franchises  of  different  length  and  character." 

In  order  to  help  solve  the  problem  the  Commission  retained 
in  consultation  in  connection  with  franchise  values,  Prof.  Henry 
C.  Adams  and  with  his  assistance,  the  following  theory  was 
adopted: 

The  routes  and  car  mileage,  with  accompanying  gross  earnings 
for  each  route,  were  worked  out  and  apportioned  under  each 
franchise,  being  based  on  the  assumption  that  gross  earnings 
w^ere  everywhere  proportionate  to  car  mileage.  In  a  similar 
way  the  operating  expenses,  which,  including  taxes  and  main- 
tenance, were  found  in  Chicago  to  approximate  70  per  cent,  of 
the  gross  income,  were  assigned  under  each  franchise.  The 
cost  of  reproduction  of  the  physical  property  under  each  fran- 
chise was  easily  determined  and  the  value  of  jointly  used  prop- 
erties such  as  power-houses,  car  barns,  tools,  cars,  etc.,  were 
apportioned  on  a  car  mileage  basis.  Increase  in  earnings  for  the 
unexpired  life  of  franchises  was  also  considered  and  the  value 
of  the  estimated  net  earnings  for  future  years  was  finally  derived 
after  deducting  an  amount  required  to  support  invested  capital 
at  the  rate  of  5  per  cent,  compound  interest.  The  net  earnings 
capitalized  as  to  their  present  worths  were  taken  as  the  value  of 
the  franchises. 

In  connection  with  the  Chicago  appraisals  it  is  important  to 
note  that  while  "present  values"  were  the  ones  adopted  in 
determining  final  values,  the  basis  of  settlement  and  agreement 
with  the  Traction  Companies  expressly  provided  that  the 
physical  properties  were  to  be  largely  improved,  practically 
reconstructed  in  part,  and  the  cost  of  doing  this  work,  including 
allowances  for  a  10  per  cent,  profit  and  other  allowances  to  the 


EXAMPLES  OF  IMPORTANT  APPRAISALS       337 

Companies,  was  to  be  capitalized  and  added  to  the  agreed  valua- 
tion of  the  tangible  and  intangible  properties.  Consequent!}^ 
the  renewed  property  has  in  effect  been  cajDitalized  twice,  once 
in  the  original  valuation  and  the  second  time  when  replaced 
by  the  new,  so  that  a  revaluation  at  this  time  would  show,  quite 
a  different  ratio,  between  present  values  and  capitalization, 
from  that  shown  by  the  previous  valuation.  This  leads  to  the 
reflection  that  perhaps  the"  City  would  have  been  better  off  if 
cost  of  reproduction  new  (replacements  to  be  paid  for  by  the 
Companies)  instead  of  present  value  had  been  allowed  in  settle- 
ment with  the  Companies,  as  they  desired. 

Chicago  Consolidated  Traction  Valuation 
General  Summary 


Exhibit 


Item 


Cost,  new 


Present  value 


I 

II 

III 

IV 

V 

VI 

VII 

VIII 


Track t  $2,091,214.13   I  51,121,216.38 

Electric  power  distribution I  855,966.20  j  693,481.95 

Rolling  stock j  707,170.80.;  195,118.77 

Power  plant  equipment j  703,084.92  417,886.81 

Tools,  supplies,  materials,  etc |  88,177.91  71,999.52 

Buildings I  338,626.20  265,417.00 

Real  estate I  84,228.00  j  84,228.00 

Paving I  1,014,519.24   j  4.37,226.70 

I  S5.882,987.40  j  $3,286,575.13 

Legal  expenses,  carrying  charges  and   con-l  [ 

tingencies,  5  per  cent 294,149.37  164,328.76 

$6,177,136.77  $3,450,903.89 
Conducting     work,    furnishing     equipment 

and  brokerage,  15  per  cent .  1 926,570.52  517,635.59 

1  

Grand  Total I  $7,103,707.29  ■  $3,968,539.49 


'  For  conducting  work  an  allowance  of  10  per  cent,  was  made,  as  a  profit  on  construction 
work,  in  accordance  with  the  provision  of  the  ordinances.  The  remaining  5  per  cent,  is 
an  allowance  for  securing  the  money,  brokerage  and  incidental  expenses. — Author. 


22 


338  VALUATION  OF  PUBLIC  UTILITIES 

CLASS  A-1 

9  IN.  129  LB.  Lorain  Rail,  58  ft.  Lengths,  Crushed  Stone  Ballast, 
Welded  Joints.     Type  No.  3.     Board  of  Supervising  Engineers 

Estimate   of  Cost  to  Produce   One  Mile   of  Single   Track 
10  FT.  2  IN.  Centers 

Unit  Cost  Estimate 


Unit 


Quantity- 


Unit 
cost 


Total 
cost 


Rail 

Tie  rods 

Joints 

Ties 

Tie  plates 

Screw  spikes 

Lag  screws  (fetter  drive) . . 

Cement 

Sand,  torpedo 

Stone,  crushed 

Track    labor    (see    details 

tached) 

Track    teaming      (see     details 

attached) 


at- 


Ton 

Each 

Each 

Each 

Per  100 

Per  100 

Per  100 

Bbl. 
Cu.  yds. 
Cu.  yds. 

Ft. 

Ft. 


202.71 

910 

195 

2,604 

5,280 

10,560 

10,560 

1,263 

600 
2,162 

5,280 

5,280 


$39.00 

.25 

5.00 

.70 

9.00 

2.15 

.40 

1.60 

1.00 

1.50 

.79 

.99 


$7,905 .  69 
227.50 
975.00 

1,848.00 

475.20 

227.04 

42.24 

2,020.80 
600.00 

3,243.00 

4,171.20 
5,227.20 


Organization,  engineering  and 
incidentals,  15  per  cent 


$26,962.87 
4,044.43 


Total  cost  per  mile. 


$31,007.30 


EXAMPLES  OF  IMPORTANT  APPRAISALS       339 

CLASS  A-1 

Itemized  Labor  Charges 

Excavation: 

Subgrade ^^ 

Grading 03 

Total 33  .33 

Track  laying: 

Ties 02 

Tie  plates  and  fastenings 02 

Rails  and  fastenings 10 

-  Tie  Rods 02 

Surfacing  and  aligning 05 

Total 21  .21 

Ballast 10 

Concreting 1^ 

Total  labor .■ "9 

Teaming,  including  hauling  rails 99 


Handling  of  scrap  included  in  excavation. 

Following  charges  included  in  organization,  etc. 

Temporary  track I'l 

Tools,  supplies 10 

Watchman 1'* 

Miscellaneous 06 

.44 


340 


VALUATION  OF  PUBLIC  UTILITIES 


Depreciation  of  One  Mile  of  Single  Track.     Class  A-1 
Depreciation  Due  to  Substructure 


Cost  new 


Scrap 
value 


Wearing 
value 


475.20 


227.04 


Ties $1,848.00 

Tie-rods 227.50 

2.5  tons  scrap  at  $10.00 

Tie-plates 

7  tons  scrap  at  SIO. 00 

Screw  spikes 

3  tons  scrap  at  SIO. 00 

Lag  screws 

Cement      ] 

Sand  >  in  concrete 

Stone         J 

Stone  ballast,  1,185  cu.  yd.  at  SI. 50. 

Minus  25  per  cent,  for  reclaiming. , 

Labor  at  25  cents  per  foot 1,320. 00 

Teaming  at  50  cents  per  foot 2,640. 00 


42.24 
4,086.30 
1,777.50 


525.00 
70.00 
30.00 


444 . 38 


$1,848.00 
202 . 50 


405 . 20 


197.04 

42.24 

4,086.30 


1,333.12 
1,320.00 
2,640.00 


$12,643.78      S569.38       $12,074.40 


Life  of  substructure,  25  years. 

Annual  depreciation  in  per  cent,  of  wearing  value 4  per  cent. 


Depreciation  Due  to  Rail 


Cost  new 


Scrap  Wearing 

value  value 


Rail— cost  of  rail [    $7,905.69 

Scrap  at  $11.00  per  ton.. $2, 119. 81  j 

Less  5  cents  per  foot  for  ! 

removal 264.00 


$1,855.81    

Joints 795.00 

Labor  depreciated  with  rail  .21  per 

foot 1,108.80 

Teaming  depreciated  ^\-itli  rail  .32  per 

foot • 1,689.60 


1,855.81 


$11,679.99     $1,855.81 


6,049.88 
795.00 

1,108.80 

1,689.60 


),823.28 


Excavation 


Parts  not  Depreciated 

Labor  at       .33    1     _„  ,     ^ 

Teaming  at.  17    |  -^O  per  foot. 


$2,640.00 


EXAMPLES  OF  IMPORTANT  APPRAISALS      341 

Total  Cost  of  Parts  Depreciated 

Cost  of  parts  depreciated  -with  substructure $12,643.78 

Costs  of  parts  depreciated  with,  rail 11,679.09 

Cost  of  parts  not  depreciated 2,640. 00 


$26,962.87 
$12,643.78  =  46.9  per  cent,  of  $26,962.87 
11,679.09  =  43.3  per  cent,  of    26,962.87 
2,640 .  00  =   9 . 8  per  cent,  of    26,962 .  87 

Above  percentages  to  be  used  to  distribute  to  substructure  and  rail  the 
proper  proportion  of  parts  of  cost  yet  to  be  depreciated. 

Parts  Yet  to  be  Depreciated 

Organization,  engineering,  incidentals,  etc.,  15  per  cent $  4,044.43 

46.9  per  cent,  of  $4,044.43  =  amount  to  be  depreciated  with 

substructure 1,896.84 

Actual  wearing  value  of  substructure 12,074.40 


$26,962.87 
Total  value  of  substructure  to  be  depreciated,  4  per  cent. 

annually $13,971 .  24 

4  per  cent,  of  $13,971.24  =  $558.85  annual  depreciation. 
43.3  per  cent,  of  .$4,044.43=  amount  to  be  depreciated  with 

rail 1,751.24 

Actual  wearing  value  of  rail 9,823 .  28 


Total  wearing  value  of  rail $11,574 .  52 

Original  depth  of  head,  80/64. 
Scrap  depth  of  head,  40/64. 
Wearing  depth  of  head,  40/64. 

1/40  of  $11,574.52  =  $289.36,  depreciation  due  to  each  1/64  in.  of  wear. 
9.8  per  cent,  of  .$4,044.43  =  amount  of  15  per  cent,  charge  not 

depreciated $      396 .  35 

Cost  of  parts  not  depreciated 2,640. 00 


$  3,036.35 
Recapitulation 

Parts  depreciated  wth  substructure $13,971 .24 

Scrap  value  of  substructure 569.38 

Parts  depreciated  Avith  rail 11,574.52 

Scrap  value  of  rail 1 ,855 .  81 

Parts  not  depreciated  (excavation) 3,036.35 


Total $31,007.30 


342  VALUATION  OF  PUBLIC  UTILITIES 

Chicago  &  North  Shore  Street  Railway  Company 

Edgewater  Power  Plant  Bldg.  &  Car  House  Built  1894 

Cost  new 

Preparation  of  site S      100 .  00 

Excavation  and  fill 1,178.00 

Foundations  and  concrete  floors 7,077. 00 

Superstructure  masonry. 21,006 . 00 

Structural  steel  and  iron 7,046. 00 

Carpenter  work 9,755 .  00 

Mill- work,  including  hardware,  painting  and  glazing 1,976.00 

Roofing 1,203.00 

Sheet  metal  and  skylights 1,431 .  00 

Plastering 360. 00 

Painting 200. 00 

Drainage  sj^stem  (pumping  and  lockers) 1,147 .  00 

Heating  system 286 .  00 

Lighting  system 331 .  00 

Elevator,  etc 150. 00 

$53,246.00 
15  per  cent,  added  for  engineering  and  incidentals 7,986.90 

$61,232.90 
Depreciation,  16  years  at  1  1/2  per  cent,  per  annum 14,695.90 

Total  present  value $46,537 .  00 


EXAMPLES  OF  IMPORTANT  APPRAISALS       343 


Single  Track  Braxch  Off 

45  to  90  degrees 

Unit  Cost  Estimate 


Unit 
cost 


Total 
cost 


Layout : 

1  Switch  and  mate $125.00 

1  Frog 45 .  00 

Tangent   rail   included,    50 

ft.  at  .  75 37 .  50 

Curved  track   included,    75 

ft.  at  3.00 225.00 

Joints    16    pr.    complete    at 

$1.10 17.60 

Tie  plates  150  at  .09 13.50 


$463 . 60 

Excavation Cu.  yds. 

Ballast Cu.  yds. 

Ties b"  M. 

Spikes Keg 

Labor 


43 

40 

1200 

1 


.50 

1.50 

30.00 

4.00 


$463.60 

21 .  50 

60.00 

36.00 

4.00 

100.00 


Total  cost. 


$685.10 


Double  Track  Branch  Off 

45  to  80  degrees 

Unit  Cost  Estimate 


Unit 
quantity 


Unit 

cost 


Total 
cost 


Layout    complete    (ties,    plates     and 

joints  included) Each 

Excavation Cu.  yds. 

Ballast Cu.  yds.i 

Ties B.  M. 

Spikes Keg 

Labor 


1 

$1,000.00 

$1,000.00 

80 

.50 

40.00 

72 

1.50 

108.00 

2500 

30.00 

75.00 

2 

4.00 

8.00 
200.00 

Total  cost $1,431 .  00 


344 


VALUATION  OF  PUBLIC  UTILITIES 


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EXAMPLES  OF  IMPORTANT  APPRAISALS       345 

Union  Electric  Light  and  Power  Company,  St.  Louis,  Mo. — In 

1911  the  Municipal  Public  Service  Commission  of  St.  Louis  issued 
an  order  reducing  the  rates  of  the  local  lighting  Company,  said 
order  being  based  on  a  valuation  of  the  Company's  property.  The 
Company  submitted  an  appraisal  made  up  by  their  engineers, 
aggregating  slightly  over  $24,000,000  (see  Table  VII)  which  the 
Commission  analyzed  and  verified  through  making  a  valuation 
with  its  own  engineers.  The  results  of  the  Commission's  ap- 
praisal showed  a  valuation  of  slightly  over  S  16,000,000  (see  Table 
XXVIII)  including  an  allowance  of  $1,000,000  for  "Cost  of  Es- 
tablishing Business"  and  $80,000,  the  capitalization,  at  8  per  cent, 
of  pole  rent  saved.  The  valuations  submitted  by  the  engineers  of 
the  Company  and  the  Commission,  as  well  as  a  comparison  of  their 
figures  of  net  plant  cost  (see  Table  IX)  and  a  typical  detail  sheet 
(see  Table  XX)  relating  to  the  miscellaneous  physical  property, 
are  shown  on  the  following  pages. 

The  Commission  made  up  its  estimate  of  value  on  the  basis 
of  expenditures  by  the  Company,  disregarding  the  latter's  claim 
that  its  estimated  cost  of  reproduction  new  should  be  the  value 
adopted.  Using  the  actual  expenditures  of  the  Company  to 
establish  its  unit  prices,  the  Commission  held  that  there  should 
be  no  allowance  for  a  general  contractor's  profit,  allowing  how- 
ever, 5  per  cent,  for  engineering,  5  per  cent,  for  contingencies  in 
addition  to  ''some  special  percentages  for  contingency"  allowed 
on  certain  items.  Interest  during  construction,  at  the  rate  of 
6  per  cent.,  was  allowed  to  the  amount  of  $725,780  as  well  as 
taxes  and  insurance  during  construction.  The  Company's 
engineers  offered  tabulations  showing  the  "going  value"  or 
"continuous-property  value"  of  the  investment  in  accordance 
with  the  practice  of  the  Railroad  Commission  of  Wisconsin,  but  the 
Commission  refused  the  allowance  of  any  such  value  holding  that 
a  deficit  properly  allowed  in  capitalization,  as  the  cost  of  estab- 
lishing a  business,  should  be  limited  to  a  reasonable  time  at  the 
beginning  of  a  new  business  and  that  for  rate  making  purposes, 
going  value  w^as  identical  with  the  cost  of  establishing  the 
business.  It  recognized  that  there  are  certain  expenses  of  organ- 
ization proper  for  capitalization,  but  held  that  expenses  prelimi- 
nary to  the  organization  of  a  corporation  in  prospecting  the  field 
and  interesting  stockholders  and  promoter's  profits  were  not, 
under  the  laws  of  the  state,  proper  items  for  consideration. 
Real  estate  at  its  present  value  was  allowed.     Discount  on  bonds 


346  VALUATION  OF  PUBLIC  UTILITIES 

was  not  considered  proper  for  capitalization  but  only  to  "be 
treated  as  interest  to  be  paid  out  of  the  fair  rate  of  return  allowed 
on  the  earning  value  of  the  property."  No  franchise  values 
were  recognized  because  they  "were  given  free  by  the  public. 
They  cannot  then,  with  justice,  be  valued  against  the  public  in 
establishing  the  rates."  In  determining  present  value,  the 
Commission  considered  only  actual,  accrued  depreciation  and  did 
not  make  deductions  for  theoretical  depreciation  holding  that 
such  estimates  "  are  extremely  problematical  and  these  elements 
should  not  be  generally  taken  into  account  in  determining 
present  value." 

TABLE  VII 

Summary 
Estimated  Cost  of  Reproduction  New  as  Existing  of  the  Property 
OF  the  Union  Electric  Light  and  Power  Company,  Saint  Louis, 
Missouri,  as  of  October  31,  1909,  as  Presented  by  the  Company 

I.  Development:  Item  Total 

1.  Development  Period  (Obtaining  Rights 
and  Capital). 

a.    Time  and   Expense  of  Development 
'Organization    (3    per    cent,    of    Item 

11) $724,365 

h.    Interest  on  Expenditures  during  De- 
velopment Period  (Computed) 138,3.5.5  $862,720 

II.  Construction: 

1.  Time  and  Expense  of  Permanent  Organi- 
zation (Inventory  priced) 428,905 

2.  Cost  of  Reproducing  Real  Estate  (Ap- 
praisal by  Zeibig  and  Benoist) 3,449,220 

3.  Cost  of  Construction  and  Equipment 
based  partly  on  Labor  and  Material  and 
partly  on  Sub-contracts: 

a.    Building     and     Improvements     (In- 
ventory priced) $2,787,343 

h.   Piping  (Inventory  priced) 335,825 

c.  Power   Plant    equipment   (Inventory 

priced) 3,365,-535 

d.  Sub-station     equipment      (Inventory 

priced) 661,757 

e.  Switchboards  (Inventory  priced) 332,596 

/.    Series     arc     apparatus     (Inventory 

priced) 61,234 

g.  Storage  batteries  (Inventory  priced)  259,061 
h.   Distribution        system — underground 

(Inventory  priced) 2,869,323 


EXAMPLES  OF  IMPORTANT  APPRAISALS       347 

CosTRucTiON  (Cont'd.)  Item                  Total 
i.    Distribution    system — overhead    (In- 
ventory  priced) 1,471,624 

j.    Transformers  (Inventory   priced)....  182,534 

k.    Meters    (Inventory   priced) 361,711 

I.    Arc    lamps    (Inventory    priced) 116,521 

?H.  Nernst    lamps    (Inventory    priced)..  45,163 

n.   Motors    (Inventory    priced) 19,288 

0.    Isolated    plants    (Inventory    priced)  30,969 

p.   Steam  heat  Unes    (Inventory  priced)  12.650 
q.    Teams,     wagons     and      automobiles 

(Inventory   priced) 45,589 

r.    Tools  (Inventory  priced) 32,724 

s.    Furniture    and    fixtures     (Inventory 

priced) 44.938 

t.     Incidentals      and      contingencies     (5 

per  cent,  of  Items  3  h-s) 253,308         13,289,693 

4.  General    Contractor — Overhead    Charges 

and  Profit  (10  per  cent,  of  Item  3) 1,328,969 

5.  Cost    of    Engineering     (5     per    cent,    of 

Items  3-4) 730,933 

6.  Intere.st    on    Construction    Expenditures 

(Computed) 2,490,749 

7.  Taxes    and    Insurance   on    Construction 

(Computed) 276,365 

8.  Working  Capital: 

a.  Stores     and     supplies     (Actual     per 
records) $391,246 

b.  Cash    or   equivalent    (Actual    as    per 
Auditor) " 484,578 

c.  Incidentals  (10  per  cent,  of  Item  8a)  39,124  914,948 

9.  Edison      Licensee      Agreement       (Esti- 
mated)   200,000 

10.  Ivinloch    Pole    Right    Agreement    (Esti- 
mated)   .     100.000 

Total  Cost  of  Reproduction  as  of  Octo- 
ber 31,  1909  (subject  to  exceptions 
noted  below) S24,072,502 

Note. — The  above  estimate  does  not  include  any: 

(a)  "Going  concern"  value,  of  the  character  recognized  by  authoritative 
decisions. 

(b)  Profits  of  promotion. 

(c)  Discounts  and  commissions  on  securities. 

(d)  Special  value  of  existing  franchises. 

(e)  Assets  not  included  in  estimated  cost  of  reproduction. 
(/)    Net  investment  in  superseded  property. 


348  VALUATION  OF  PUBLIC  UTILITIES 

TABLE  XXVIII 
Estimated  Earnixg  Value  of  Total  Present  Property 
P.  S.  C. 
I.  Organization: 

1.  Expense  of  Organization $     125,500 

2.  Interest  on  Organization  Expense 32,944 

II.  Construction: 

1.  Cost  of  Real  Estate 800,000 

2.  Cost  of  Construction 12,586,741 

3.  Cost  of  Engineering 629,337 

4.  Interest  on  Construction  Expenditure 725,780 

5.  Taxes  and  Insurance  during  Construction 130,203 

III.  Working  Capital 865  520 

IV.  KiNLOCH  Pole  Contract 80.000 

V.  Allowance  for  Cost  of  Establishing  Business 1,000,000 

§16,976,025 

Deduct  Depreciation  for  Present  Condition 841,632 


.§16,134,393 


TABLE   IX 
Summary  of  Estimate  of  Construction  Cost 


P.  S.  C.  esti-          Company's        Difference 
mated  cost         estimated  cost      per  cent. 

1     Ashlev  St.  Plant 

$5,131,378.71      $5,315,667.00!     3.59 

6.54,309.38           683,074.00       4.39 

677,8.54.97           704,597.00       3.95 

202,959.63;           211,884.00:      4.39 

209,020.90            217,680.00        4.14 

290,5.55.68           382,002.00     31.48 

230,016.41           243,143.00       5.76 

28,832.75!            41,538.00  ;   44.06 

1,413,368.97        1,545,205.41        9.33 

2,870,150.18        3,013,789.61  \     5.005 

878,293.80           932,066.00  |     6.12 

2.  Lewis  St.  Plant 

3.  Sub-station  No.  3  and  10th  St 

4.  Sub-station  No.  1 

5.  Sub-station  No.  2 

6.  Sta.  A  and  B,  Sub-station  No.  4 

7.  Sub-station  No.  5 

8.  Sub-station  No.  7 

9.  Overhead  Svstem 

10.  Underground  Svstem 

1 1 .  Misc.  Physical  Properties 

Total 1 

$12,586,741.38    $13,290,646. 02»      5.51 

1 

1  Discrepancy  between  this  total  and  Company's  total,  "Cost  of  Construction"  as  shown 
in  Table  VII,  is  due  to  a  mistake  in  addition  by  Company,  in  summing  up  the  items  in  the 
Underground  System  Table  XIX. 


EXAMPLES  OF  IMPORTANT  APPRAISALS       349 

TABLE   XX 

Miscellaneous  Physical  Property 
P.  S.  C.  Estimate  of  Construction  Cost 


P.  S.  C.  esti- 
mated cost 


Company's        Difference 
estimated  cost     per  cent. 


1.  Building,  212  Gratiot  St 

2.  Isolated  Plants 

3.  Arc  Lamps 

4.  Nemst  Lamps 

5.  Motors  and  Fans 

6.  Transformers 

7.  Meters 

8.  Teams,  Wagons  and  Automobiles 

9.  Furniture 

10.  Station  Tools 

11.  Distribution  Tools 

Incidentals  and  Contingencies  5  per  cent,  of 

Distribution  System,  Items  3,  4,  5,  6,  7. 


$     3,766.00 

30,969.001 

109,084.00 

44,818.00 

13,243.00 

183,411.00 

356,360.00 

45,589.00 

42,131.00 

Inc.  in  Plants- 

13,577.00 

35,345.80 


5     3,766.00 

43,619.00 

116,521.00 

43,163.00 

19,288.00 

182,,534.00 

361,711.00 

45,589.00 

44,938.00 


32,724.00 
36,213.00 


Total $878,293.80 


$932,066.00 


6.12 


1  Heating  pipe  work  from  10th  St.  Plant  contained  in  10th  St.  pipe  work. 

2  Station  Tools  $19,146.32  Included  in  Plants. 


Macon  Gas  Light  and  Water  Company,  Georgia. — In  1910 
the  City  of  Macon,  Georgia,  having  decided  to  purcliase  the 
Water  Works  plant  of  the  Macon  Gas,  Light  and  Water  Com- 
pany, appointed  two  local  bankers,  Messrs.  E.  W.  Stetson  and 
0.  E.  Dooly,  as  members  of  an  Arbitration  Board  of  seven,  to 
which  two  engineers  were  appointed  by  the  Water  Company, 
Messrs.  N.  Wingfield,  and  A.  W.  McCallum;  these  four  appointed 
three  disinterested  hydraulic  engineers,  Messrs.  John  W.  Alvord, 
George  G.  Earl  and  Leonard  Metcalf.  Under  the  terms  of  an 
agreement  between  the  City  and  the  Water  Company,  the  gentle- 
men appointed  constituted  a  Valuation  Committee  as  well  as  a 
Board  of  Arbitration  which  was  able  to  determine  its  own 
method  of  procedure.  As  several  members  of  the  Board  were 
thoroughly  familiar  with  water  works  valuation  proceedings,  in 
order  to  save  time  the  Board  concluded  to  conduct  business 
hearings,  in  the  main  without  assistance  of  counsel.  The  evi- 
dence was  put  in  as  directly  and  as  simply  as  possible,  opportunity 
then  being  given  to  counsel  of  the  City  and  the  Company  to 
recall  and  cross-examine  witnesses  and  to  make  closing  arguments 
upon  the  evidence  adduced.     This  method  of  procedure,  while 


350  VALUATION  OF  PUBLIC  UTILITIES 

unique  and  somewhat  arbitrary,  met  with  the  hearty  approval 
and  co-operation  of  counsel  and  representatives  both  for  the 
City  and  Company,  the  Board  being  able  to  conclude  its  delibera- 
tions and  render  its  decision  within  two  weeks,  at  an  expense,  for 
the  cost  of  the  proceedings,  said  to  be  less  than  3  per  cent,  of  the 
amount  of  the  final  award.  This  satisfactory  result  is  in  marked 
contrast  to  the  frequent  expense  of  such  proceedings  which  often 
runs  to  from  10  to  15  per  cent,  of  the  final  award. 

Without  attempting  to  reproduce  all  the  data  submitted,  in  the 
following  pages  are  shown,  through  the  courtesy  of  Mr.  Metcalf, 
a  summary,  prepared  by  one  of  the  members  of  the  Board,  from 
the  evidence  submitted  and  from  certain  computations  made  in 
collaboration  with  other  members,  on  which  the  Board  based  its 
final  decision. 

In  connection  with  the  valuation  finally  determined  upon  by 
the  Board,  it  should  be  stated  that  although  a  majority  opinion 
favored  a  slightly  higher  award,  which  might  have  resulted  but 
with  a  divided  report,  the  unanimous  agreement  to  the  final 
figure  was  had  because  of  an  expressed  preference  on  the  part  of 
the  "Water  Company  to  accept  a  slightly  lower  award  with  a 
unanimous  rejDort. 

The  case  as  a  whole  is  an  unusually  interesting  and  instructive 
one  by  reason  of  the  personnel  of  the  Board,  the  methods  adopted 
in  obtaining  a  quick  and  undivided  report,  the  consideration 
given  the  various  elements  prescribed  by  the  Supreme  Court  as 
proper  for  determining  "fair  value",  the  allowance  of  12  1/2  per 
cent,  on  all  costs  of  physical  property,  including  real  estate,  for 
engineering  and  incidentals,  the  deduction  of  theoretical  depre- 
ciation only,  and  finally  the  allowance  for  franchise  and  going 
value.  The  chart  (Fig.  8)  indicating  the  method  of  figuring  and 
determining  going  value  is  referred  to  and  the  method  discussed 
under  the  head  of  "Going  Value"  in  the  preceding  pages  of  this 
book. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      351 


1900  1901  1902  1903  1904  1905  1906  1907  1908  1909  1910  1911  1912  1913  1914  1915  1916 

Fig.  8. 


352 


VALUATION  OF  PUBLIC  UTILITIES 


MACON  GAS,  LIGHT  AND  WATER  CO. 

Water  Works  General  Statistics 

Information  obtained  Nov.  23,  1910,  by  Arbitration  Board 


Year  ending  Dec.  31 


1905 


1906 


1907 


1908 


1909 


Population  on  area  served 

Pumping  entire  supply  into  high  ser- 
vice   letting    3/4   back    into    low 

servace. 

Miles  of  pipe,  all  kinds 

Miles  of  C.  I.  pipe  only 

Pop.  per  mi.  of  pipe 

Range  of  sizes,  inches  diam.  l"-20" 
inclusive. 

Per  cent,  wroughtiron 

Taps  in  serx-ice — live — 1900-2570 

Per  1000  popul 

Per  mile  of  pipe 

Persons  per  tap 

Meters 

Per  cent,  of  taps  metered 

Consump.    annual  m.  g. — 1900-997. . 

Daily,  gpd 

Per  capita,  gpd 

Per  mile  of  pipe,  gpd 

Per  tap,  gpd 

Pressure  (range)  40  to  130  lbs 

Hydrants — number  (public  only) . . . . 

Per  1000  popul 

Per  mile  of  pipe 

Gross  income,  total 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  m.g.  consump 

Gross  inc.  excl.  hyd.  rentals 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  mil.  gals 

Cost  of  oper.   excl.   fxd.   chgs.   and 

deprec 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  mil.  gals 

Per  cent,  of  gross  income 

Net  inc.  excl.  fxd.  chgs.  and  deprec.  . 

Per  capita 

Per  mile  of  pipe 

Per  tap 

Per  mil.  gals 

Per  cent,  of  gross 

Hydrant  rental,  total 

Per  hydrant 

Per  mile  of  pipe 


35,827 


39.2 

36.6 

915 


36,794 


41.6 

38.6 

885 


37,761 


43.7 

40.5 

865 


38,728 


47.1 
43.6 

882 


39,695 


48.2 

44.0 

824 


6.4% 

3,144 

88 

80 

11.4 

636 

20.2% 

1,237 

3,390,000 

94 

86,500 

1,078 


7.0% 

3,275 

89 

79 

11.2 

689 

21.0% 

1,201 

3,290,000 

90 

79,100 

1,004 


7.1% 

3,456 

91 

79 

10.9 

740 

21.4% 

1,384 

3,790,000 

101 

86,700 

1,096 


7.4% 

3,656 

94 

78 

10.6 

821 

22.5% 

1,343 

3,670,000 

95 

77,900 

1,003 


8.7% 

3,927 

99 

82 

10.1 

990 

25.2%, 

1,414 

3,870,000 

98 

80,300 

985 


218 

6.1 

5.6- 

$87,199 

2.43 

2,230- 

27.72 

70.50 

76,291 

2.13 

1,950- 

24.27 

61.70 

46,287 

1.29 

1,180- 

14.71 

37.42 

53.0% 

$40,913 

1.14 

1,040  + 

13.01 

33.07 

47.0% 

$8,625 

39.56 

220 


234 

6.4 

5.6 

$93,265 

2.54 

2,240 

28.49 

77.70 

81,783 

2.22 

1,970 

24.98 

68.10 

47;882 

1.30 

1,150 

14.62 

39.90 

51.4% 

$45,383 

1.23 

1,090 

13.86 

37.80 

48.7% 

$9,201 

39.38 

222 


239 

6.3 

5.5 

$105,990 

2.80 

2,430 

30.68 

76.60 

94,062 

2.49 

2,150 

27.20 

68.00 

57,680 

1.53 

1,320 

16.70 

41.70 

54.4% 

$48,310 

1.28 

1,110 

13.98 

34.90 

45.6% 

$9,401 

39.35 

216 


248 

6.4 

5.3 

$  109,185 

2.82 

2,320 

29.84 

81.30 

97,117 

2.51 

2,060 

26.56 

72.30 

57,062 

1.47 

1,210 

15.62 

42.50 

52.3% 

$52,123 

1.35 

1,110 

14.26 

38.80 

47.8% 

$9,514 

38.35 

218 


268 

6.7 

5.6 

$114,893 

2.90 

2,380 

29.28 

81.30 

102,003 

2.57 

2,120 

25.98 

72.10 

60,319 

1.52 

1,250 

15.36 

42.70 

52.5% 

$54,575 

1.38 

1,130 

13.90 

38.60 

47.5% 

$10,250 

38.22 

213 


Taxes,  annual  (included  above) . 
Per  cent,  of  gross  income 


7,124 

8.2% 


6,195 

6.2% 


7,153 
6.8% 


8,457 

7.7% 


9,598 
8.3% 


Securities  cover  gas  works  as  well  as  water  works. 


Bonds, 

Rate  of  interest, 

Capital  stock. 

Floating  debt. 

Actual  cost,  $689,107;  value,  $699,000,  as  of  Dec.  2,  1910. 
Water  rates,  1st  faucet,  $6.00;  bath,  S5.00;  closet,  $5.00;  meter  rates,  25(^-6*. 


EXAMPLES  OF  IMPORTANT  APPRAISALS       353 

MACON  -GAS,  LIGHT  AND  WATER  CO. 

Water  Works  Income  and  Operation 

Nov.  23,  1910.     Earnings  and  Expenses,  1905-1909,  Inclusive 


Gross  income 


1905 


1906 


1907 


1908 


1909 


Flat  rates,  domestic i  $40,705 

Flat  rates,  private  fire  protection |      3,037 


Meter  rates,  domestic I    17,256 

Meter  rates,  manufacturers  and  railroad 15,548 


Meter  rates,  elevators . . . 
City  of  Macon,  hydrants. 

Flushing  sewers 

Other  uses 


Total 

Deduct   allowances,  rebates. 


Gross  income. 


Operating  expenses  (as  below) . 


Net  income  excl.  inter,  and  deprec . 


1,160 
8,625 
1,058 
1,226 


$42,934  I    $46,176     $50,173i    $47,887 
3,006  I        3,357         4,520         4,759 


18,896 

22,318 

23,8051 

30,833 

17,169 

22,491 

19,773 

20,608 

1,160 

1.132 

1.054 

718 

9,201 

9,401 

9,514 

10,250 

1,109 

1,134 

1,143 

1,180 

1,171 

1,392 

1,411 

1,460 

$88,614 
1,414 


$94,646  $107,402;  $111,393:  $117,696 
1,381  '    1,412    2,208'    2,803 


87,199 

93,265 

105,990! 

109,185i 

114,893 

46,287 

47,882 

57,680i 

57,062 

60,319 

$40,913 

$45,383 

$48,310 

$52,123 

$54,575 

► 


Detailed  Statement  of  Operating  Expenses  Shown  Above 


Pumping  and  filtering: 

Station,  labor 

Fuel 

$5,254 

11,536 

2,290 

1,191 

1,243 

$5,760 

12,995 

1,949 

1,482 

2,797 

$6,486 

16,166 

1,897 

1,492 

2,627 

$6,419 

13,002 

2,194 

1,853 

1,741 

6,356 
12,500 
2,791 
1,666 
1,374 

Alum 

Supplies  and  expenses 

Station,  repairs 

Total 

Distribution  system 

21,516 
4,324 

24,983 

3,788 

28,669 
5,680 

25,209 
7.320 

24,687 

7,678 

Admin,  and  general: 

Salaries 

6,972 
5,098 
1,149 

7,280 
4,159 
1,401 

8,526 
4,286 
3.217 

9,480 
4,793 
1,704  ( 

9,094 
5,412 
3,812- 

Miscellaneous 

Stable,  Travel,   Legal, 

Ins.,   Soliciting, 

Real 

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12,840 

16,029 

15,977  ! 

18,318 

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103 

76 

150 

99 

37 

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7,124 

6,195 

7,153 

8,457 

9,589 

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VALUATION  OF  PUBLIC  UTILITIES 


MACON  GAS,  LIGHT  AND  WATER  CO. 
Water  Works  Depreciation  Estimate — Concluded 


Reproduc- 
tion cost 
including 
12*  per 
cent. 

Annual 
depreciation 

Total 
depreciation 

Net 

physical 

value 

% 

Amount 

Factor 

Amount 

$  45,416 

3,278 

38,363 

57,561 

$  45,416 

3  278 



$401 
440 

80 
625 

29 

17 
716 
369 

25 

85 
223 

36 
2,341 

31 





$10,017 

10,734 

3,233 

7,713 

428 

206 

4,890 

4,176 

280 

1,260 

6,750 

517 

47,727 

243 

28,346 

46,827 

4,106     

38,914  1 

873 

31,201 

1,125 

697 

1,584 
35,269 
20,592 

1,554 
11,700, 
18,322 

2,250 
3.55,000 

1,214 

1,378 

"  I."    Filter  plant 

30,379 

16,416 

"  K."  Riverside  Station  piping 

"  L."   Riverside  Station  piping 

1,274 
10,440 
11,572 

1,733 

"  0."   Distributing  pipe,  etc 

307,273 
971 

Total  items  "A"  to  "P" 

$636,248 
15,000 
19,000 

0.85%  = 

5,418 

15.4%  - 

98,174 

538,074 
15,000 

"  R."  Interest  during  construction. . .  . 

163 

2,946 

16,054 

Total  items  "A"  to  "R" 

670,248 

120,000 

9,872 

5,581 

101,120 

569,128 
120,000 

9,872 

excluded.     To  be  adjusted  on 
transfer  of  property. 

699,000 

Price  fixed  by  Board  of  Arbitrators  for  "rights,  appurtenances,  franchises  and  good  will,  exclusive  of 
stock  on  hand,  $699,000. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      367 


MACON  GAS,  LIGHT  AND  WATER  CO. 
"Water  Works  Statistics,  Reproduction  Cost 

Year  ending  Dec.  1,  1910. 

Population  U.  S.  Gov't.,  1910  =  40,662. 

Total  Pipe,  48.2  miles.     Range  of  Diameters,  inches  l"-20". 

Rated  Capacity,     10.  Mgd.  Average  Consumption,     3.87  Mgd. 

Mgd.=  Million  Gallons  Daily. 

Reproduction  Cost,  including  12  1/2  per  cent.  Engineering  and  Contingencies. 

Reproduction  Cost,  Including  12J  Per  Cent.  Engineering  and  Contingencies 


1  Intake 

2  Supply  pipes  or  conduits . . . 

3  Pumping    plant,    at    Tufts 

Springs,  Waterville  Sta.. .  . 

Pumping  plant,  at  Ocmul- 

gee  River,  Riverside  Sta  .  . 


4  Reservoirs,       Low-ser%nce, 

2  1/4  mg 

Reservoirs,    Chickamauga, 

0.072  mg 

Reservoirs,  Vineville, 

0.88.3  mg 

5  Distribution  pipe  system'  . . 
Meters 

6  Services  or  taps 

Flush,  tanks  and  fountain.  . 

7  Filter  plant- 


Amount 


Per  mile 
pipe 


S 
Per 
mgd. 


items 

%  of 

1  up  to 

12 


items 
%of 
grand 
total 


Supply  pipe  system 


Miles 


Dia. 


514,985 
75,746 

30,194 

76,346 


17,533 

6,338 

15,188 
251,670 

1,214 
24,717 

2,867 
67,662 


S622 


8  Real  estate  and  rights  of  way  48,694 
Washington  .St.  property. .  .  3,094 

9  Inventory,  Supplies,  etc  . .  .  Excluded 
To  be  adjusted   after  pur-| 

chase I 

10  Organization,       incorpora-  ' 

tion,  etc !  15,000 

11  Interest  during      construe-  i 

tion i  19,000 


12  Going  value 

.3  Franchise  and  other  values. 


120,000 
9,782 


2.2 
11.3 


4.5 
11.4 


2.6 

0.9 

2.3 
37.5 
0.1 
3.7 
0.4 
10.2 

7.3 
0.5 


2.2 

2.8 


99.9 


1.9 
9.5 


3.8 
9.5 


2.2 

0.8 

1.9 
31.4 
0.0 
3.1 
0.4 
8.5 

6.1 
0.4 


Distribution  pipe 
system 


Miles 


Dia. 


4.12=   9.2 


1.50=  3.3 
5.23=11.6 
3.32=  7.4 
2.32=  5.2 
20.78=46.4 
7.09  =  15.7 

0.53=  1.2 


1.9      44.89=100 
2.4 


15.0 
1.2 


99.9 


Grand  total $800,120      Less  ace  rued  d  epreciati 


24" 

20" 

16" 

14" 

12" 

10" 

8" 

6" 

4" 

3" 


$699,000 


368 


VALUATION  OF  PUBLIC  UTILITIES 


Reproduction  Cost,  Including  12i  Per  Cent.  Engineering  and  Contingencies- 

Continued 


$ 

$ 

Amount 

Per  mile 

Per 

pipe 

mgd. 

'5a  C.  I.  pipe  at  S25  =per  net 

ton S165,93S 

b  Pipe,  wrot.  iron,  galv 5,936 

c  Specials  470,000  lbs  at  2.61  «  12,263 

Hydrants 8,044 


d  Valves i 

e  Laj-ing  and  miscellaneous  . 

f  Rock,  c.  y.  at  S ' 

g  Pavement 


9,700 
103,269 


S3, 440 
123 
255 
167 

201 
2,142 


22,266 


462 


Total  Item  5. 


8327,416       56,790 


-7a  Sedimentation  tanks, 
5  1/3  mgd 

b  Filter  beds,  etc.,  complete 
5  1/3  mgd 

c  Clear  water  basins,  66,000 

gals 

Pumps,     SI, 519;     piping, 

S4,360 

Buildings 

Total  Item  7 


17,145 


1,715 


33,750 3,375' 


1,357 


5,879 
9,531 


136 


5881 
953 1 


867,662     6,766 


Net    tons  C.  I.   pipe,  6700 .    Tons  per 

mile,       148.5. 
Lbs.  per  mile  10,420.  35.1%  of  weight; 

4 .  56<~t  of  cost  of  pipe. 

7.6%  of  cost  of  pipe. 


Final  Agreed  Values: 


Reproduction  cost S670,248 

Less  accrued  depreciation 101,120 


Net  physical  value 5569,128 

Going  value 120,000 

Franchise,  etc •       9,872 


Agreed  value S699,000 


EXAMPLES  OF  IMPORTANT  APPRAISALS       369 

MACON  GAS,  LIGHT  AND  WATER  CO. 

Summary 

Original  Cost,  without  allowance  for  cumulative  loss 
of  $207,786'  (6  per  cent,  basis  including  deprecia- 
tion)      $689,107 

Including  cumulative  loss 896,893 

Reproduction  Cost,  exclusive  of  going  value $667,126 

Going  value 144,000 

$811,126 
Less  accrued  depreciation 101,120    $710,006 

Worth  of  Service  to  Consumers: 

Reproduction  cost  less  accrued  depreciation  exclud- 
ing going  value $566,006 

Reasonable  increment  25  per  cent 141,501    $707,507 

Commercial  Aspect  Capitalization: 

Nov.,  1910.     Net  income $57,000 

Deduct  depreciation  including  1/4  per  cent,  con- 
ting,  depreciation 7,000 

$50,000 

Capitalize  $50,000  at  6  per  cent.  = $833,000 

Capitalize  $50,000  at  7  per  cent.  = 714,000 

Or  since  contract  with  city  expires  within  two  years: 

From  net  income  less  depreciation $50,000 

Deduct  10  per  cent,  of  domestic  income  for  rate  re- 
duction for  concession 7,700 

$42,300 

Capitahze  $42,300  at  6  per  cent.  = 704,000 

But  as  two  years  must  elapse  before  revision $715,000 

Dec.  2,  1910  Report  of  Board  of  Arbitration,  exclusive 
of  stock  on  hand $699,000 


Note. — After  final  valuation  the  above  figures  were  modified  as  follows: — 
W^ater  rights  at  Water^^lle,  $3,122,  added  to  reproduction  cost  making  the 
latter,  $670,248.  Depreciation  kept  at  same  figure.  Going  value  cut  to 
meet  agreed  value  to  $120,000.  Franchise  value  set  at  $9,872  to  meet 
agreed  value  of  entire  plant. 

Hence: 

Reproduction  cost $670,248  Net  phj^sical  value $569,128 

Less  accrued  depreciation. .  .       101.120  Going  value 120,000 

Franchise,  etc 9,872 

Net  Physical  value $569,128  

Total $699,000 

'  Includes  10  per  cent,  contractors  profit  +  10  per  cent,   engineer  and 
administrator. 

24 


370  VALUATIO:^  OF  PUBLIC  UTILITIES 

Appraisal  of  Steam  Railroads  in  Michigan. — Several  appraisals 
of  the  steam  railroads  of  Michigan  have  been  completed  under  the 
direction  of  the  State  Legislature  to  "  inquire  into  and  ascertain 
the  value  of  the  property  of  corporations  paying  specific  taxes 
under  any  of  the  laws  of  this  State."  The  first  appraisal  was 
begun  in  1900,  Prof.  Mortimer  E.  Cooley  having  been  appointed 
in  charge  of  the  work.  The  number  and  magnitude  of  the  rail- 
road properties,  the  desire  to  complete  the  valuation  in  the 
shortest  time  possible  and  the  general  lack  of  information  and 
rules  of  procedure  for  railway  valuation  made  the  task  a  novel 
and  herculean  one.  The  results  accomplished,  however,  were  so 
generally  satisfactory,  that  although  it  was  felt  necessary  to 
check  and  revise  the  work  by  a  new  valuation  two  3'ears  later, 
the  methods  adopted  have  largely  resulted  in  furnishing  an 
example  which  has  been  more  or  less  followed  in  later  appraisal 
work,  particularly  in  Wisconsin  and  Minnesota.  It  was  promptly 
recognized  by  Professor  Cooley  and  the  Board  of  Associate 
Engineers  he  collected  about  him,  that  it  was  necessary  to  include 
in  the  total  value  of  the  properties,  not  only  that  of  the  physical 
plants  which  could  be  "seen  and  felt,"  but  also  the  value  of 
properties  which,  while  not  visible,  were  eciually  a  part  of  the 
plants,  in  addition  to  the  intangible  costs,  always  essential  to  the 
production  of  operating,  going  properties.  Professor  Henry  C. 
Adams  had  charge  of  the  evaluation  of  the  purely  non-physical 
part  of  the  properties  which  included  franchises;  and  what  has 
come  to  be  known  as  going  values.  Much  of  the  work  of  Profes- 
sor Adams  was  unic^ue  and  his  methods^  have  been  more  or  less 
followed  in  some  later  appraisals.  The  values  were  worked  out 
from  a  consideration  of  incomes  and  expenses,  certain  net  returns 
being  capitalized  as  giving  the  proper  non-physical  values  de- 
sired, as  explained  in  Chapter  VII  under  "Franchises."  These 
values  were  materially  increased  in  the  valuation  of  1902  by  a 
change  in  details  and  a  decrease  in  the  interest  rate.  The 
allowances  used  in  the  Michigan  appraisal  for  engineering 
incidentals,  interest  during  construction,  etc.,  have  been  the 
object  of  wide  interest  and,  as  to  their  propriety,  the  subject  of 
much  controversy.     The  allowances  made  were  as  follows: 

"Engineering. — This  covered  all  the  cost  of  preliminary  and  loca- 
tion surveys,  design,  and  supervision  of  construction  of  the  work,  and 

^  Explained  in  Bulletin  21,  U.  S.  Bureau  of  Census.     Page  78. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      371 

all  expenses  connected  therewith.  This  was  covered  by  a  charge  of 
4  per  cent,  of  the  cost  of  reproducing  the  permanent  way  and  structure, 
but  not  the  ecjuipment. 

Legal  Expense. — This  item  is  inseparable  from  the  construction  work, 
and  was  fixed  at  one-half  of  1  per  cent,  of  the  cost  of  the  same  items  as 
affected  by  the  engineering  charge. 

Organization  Expense. — This  covered  the  cost  of  promotion,  financing, 
and  general  supervision  of  construction,  together  with  general  office 
expense.  These  items  were  covered  by  an  application  of  1.5  per  cent, 
of  the  cost  of  the  above  items. 

Interest. — This  item  is  intended  to  cover  interest  on  money  during  the 
period  of  construction.  The  length  of  time  taken  to  build  would,  of 
course,  be  variable.  It  was  assumed  that  3  per  cent,  on  the  entire  cost 
of  construction  and  equipment  would  be  conservative,  and  this  figure 
was  used. 

Discount  on  Bonds. — This  was  not  included,  for  the  reason  that  it  was 
considered,  not  as  a  proper  capital  charge,  but  rather  as  an  adjustment 
of  the  interest  rate  to  the  existing  market  condition,  and  as  chargeable 
to  interest  account  and  not  capital. 

The  Charge  of  10  Per  Cent,  for  Contingencies. — Perhaps  no  single 
feature  of  the  Michigan  appraisal  of  physical  property  has  been  so 
generally  criticised  as  the  charge  of  10  per  cent,  of  the  entire  estimated 
cost,  including  all  percentage  charges,  to  cover  "contingencies." 

The  reasons  for  the  allowance  of  10  per  cent,  were: 

"  (a)  The  conditions  under  which  this  particular  inventory  and 
appraisal  were  made,  as  to  time  and  lack  of  co-operation  of  the 
companies,  made  it  practically  certain  that  some  items  of  value 
were  missed  in  the  appraisal,  such  as  station  and  miscellaneous 
equipment,  frogs,  switches,  track  structures,  buildings  owned  by 
the  companies  and  occupied  by  others,  etc. 

(b)  That  there  were  many  and  large  elements  of  physical  cost 
not  ascertainable  by  a  physical  inspection,  such  as  deep  founda- 
tions, many  thousands  of  yards  of  earth  in  swamps  and  sink  holes 
(a  very  general  condition  of  roads  in  the  Southern  Peninsula),  con- 
cealed classification  due  to  growth  of  grass  or  washing  of  banks  and 
many  other  cases  of  work  actually  done,  invisible  after  a  lapse  of 
years. 

(c)  The  failure  on  the  part  of  railroad  companies  to  keep  any- 
thing like  a  complete  history  of  construction  operations,  and  the 
changes  of  operating  officials  from  year  to  year,  caused  the  loss  of 
record  of  practically  all  the  expense  due  to  extra  hazard  and  risk 
which  the  construction  engineer  provides  for  by  his  "  contingencies." 

(d)  The  inclusion  in  operating  expense,  every  j'-ear,  of  sums 
which  are  properly  construction,  and  which,  if  added  to  unit  prices 


372  VALUATION  OF  PUBLIC   UTILITIES 

of  construction  work,  would  cause  the  cry  that  such  unit  prices 
were  too  high.  For  instance,  the  appraisal  estimate  on  earth  was 
^  17  cents  per  cubic  yard  with  no  allowance  for  overhaul.  Very 
much  of  the  grade  in  the  State  had  actual  cost  far  in  excess  of  this 
figure  and  practically  every  road  spends  a  large  sum  annually  for 
the  first  four  or  five  years,  which  is  charged  to  operation  but  is  in 
reality  a  part  of  the  cost  of  completing  the  road  bed. 

(e)  No  account  was  taken  of  appreciation  of  any  of  the  elements 
entering  into  a  road.  There  is  no  doubt  that  road  bed,  for  example, 
does  appreciate,  due  to  ballasting  and  track  work.  These  items  go 
far  toward  accounting  for  the  contingency  item  on  an  old  road  such 
as  the  Michigan  Central. 

(/)  There  is  a  considerable  amount  of  cost,  which  cannot  be  taken 
out  of  capital,  where  facilities  are  abandoned  or  line  or  grade 
changed.  These  changes  are  common  to  all  growing  roads;  they 
are  due  to  the  demands  for  greater  traffic ;  they  are  necessary  to  the 
welfare  of  the  community  served;  they  are  often  made  at  points 
where  no  charge  of  defective  designs  will  apply.  They  might  be 
termed  expenses  due  to  the  development  of  the  state,  and,  in  the 
development  of  the  railroad  business,  they  were  absolutely  neces- 
sary for  its  present  s'tandard  of  efficiency.  They  are  incapable  of 
exact  and  definite  determination  and  must  of  necessity  be  included 
as  contingent  expenses."^ 

The  appraisal  made  in  1900  included  values  for  real  estate  and 
right  of  way  which  were  reached  after  much  discussion  and  con- 
sideration of  the  subject.  Subsequent  investigation,  in  connec- 
tion with  the  1902  appraisal,  including  a  thorough  examination 
as  to  the  prices  actually  paid  for  real  estate,  confirmed  the 
opinion  that  the  so-called  "market  prices"  used  in  the  earlier 
work  were  erroneous  and  misleading  and  resulted  in  a  material 
increase  for  the  values  allowed  in  the  work  of  1902. 

In  estimating  present  value  neither  absolute  nor  theoretical 
depreciation  was  considered  in  connection  with  engineering, 
rights  of  way  and  real  estate,  grading,  ballast,  legal  expenses, 
interest  or  organization  expenses. 

The  results  of  the  appraisal  of  1900  are  shown  in  the  following 
table: 

^  "The  Valuation  of  Public  Service  Property,''  H.  E.  Riggs,  Transactions 
of  the  American  Societv  of  Civil  Enaiineers,  Volume  LXXII,  June,  1911. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      373 


TABLE    7.'— GRAND    SUMMARY  OF    RAILROAD    .APPRAISAL    OF 
1900  AS  TO  SEVENTY-EIGHT  INCORPORATION  RAILROADS 

Physical  Appraisal 


Item 
No. 


Subject 


Cost  of 
reproduction 


Present  value 


9 
10 

11 
12 
13 
14 
15 
16 
17 
18 
19 
20 
21 
22 
23 
24 
2.5 
26 
27 
28 
29 
31 
32 
33 
34 

35 
36 


Engineering,  4  per  cent,  on  items  2  to  25, 
inclusive,  and  on  item  33. 

Right  of  way  and  station  grounds 

Real  Estate 

Grading 

Tunnels 

Bridges,  trestles,  and  culverts 

Ties  (cross-  and  switch-ties) 

Rails 

Track  fastenings 

Frogs,  switches,  and  crossings 

Ballast 

Track  laying  and  surfacing 

Fencing 

Crossings,  cattle  guards,  and  signs 

Interlocking  and  signal  apparatus 

Telegraph  (30)  telephones 

Station  buildings  and  fixtures 

I  Shops,  round-houses  and  turn-tables 

Shop  machinery  and  tools 

Water  stations 

Fuel  stations 

Gr.ain  elevators 

Warehouses 

Docks  and  wharves 

:  Miscellaneous  structures 

Locomotives 

Passenger  equipment 

Freight  equipment 

I  Jliscellaneous  equipment .  .  . 

Ferries  and  steamships 

Electric  plants 

i  Terminals.     Included  in  it€ms  1-32 

Legal  expenses,  0.5  per  cent,  on  items  2- 
25,  33. 

I  Interest,  3  per  cent,  on  items  1-34 

I  Miscellaneous  expenses,  organization,  1.5 
per  cent.     Items  1-34. 
Contingencies,  10  per  cent,  items  1-34 


$5,386,772 

27,745,313 

863,337 

21,699,995 

1,148,070 

8,027,119 

11,139,924 

28,703,012 

3,845,030 

1,469,781 

3,723,558 

6,555,638 

2,763,595 

607,542 

501,883 

258,985 

4,108,736 

2,157,228 

1,107,910 

725,670 

303,289 

1,336,794 

258,646 

5,531,919 

1,234,345 

9,021,517 

3,197,473 

19,734,240 

702,940 

1,725,000 

93,061 

673,349 

5,290,549 
2,645,277 

18,428,759 


$5,386,772 

27,745,313 

863,337 

21,693,024 

1,093,445 

6,337,819 

6,148,748 

21,865,994 

2,987,982 

1,040,120 

3,723,558 

6,400,972 

1,627,790 

428,474 

448,686 

134,797 

3,111,103 

1,467,569 

882,634 

522,135 

201,461 

1,609,043 

183,910 

3,831.934 

856,253 

5,092,053 

2,277,271 

13,690,587 

423,689 

1,095,500 

89,898 

673,349 

5,290,549 
2,645,277 

15,127,110 


37 


Total  cost  of  construction  and  equipment.  $202,716,262 

Stores  and  supplies i  1,474,829 

Average  per  main-line  mile !  28,263 

Average  per  total  track  mile '  18,627 

Total  value  of  non-physical  element 

(H.  C.  Adams). 


$166,398,156 

1,474,829 

23,495 

15,290 

35,814,043 


'  "The  Valuation  of  Public  Service  Property,"  H.  E.  Riggs,  Transactions  of  the  American 
Society  of  Ci\'il  Engineers,  Volume  LXXII,  June,  1911. 


374  VALUATION  OF  PUBLIC  UTILITIES 

Northern  Pacific  Railway,  State  of  Washington. — The  Railroad 
Commission  of  Washington  has  made  appraisals  of  the  larger 
part  of  the  property  belonging  to  the  steam  and  electric  rail- 
roads operating  in  that  State.  In  its  report  on  methods  of 
procedure,  the  Commission  says: 

"Our  engineers  were,  therefore,  instructed  to  procure  not  only  the 
original  cost  and  the  cost  of  duplication  or  reproduction,  but,  whenever 
possible,  to  procure  in  detail  every  unit  quantity  of  labor  and  material 
entering  into  the  construction  of  the  road.  This  evidence  was  procured 
and  introduced  before  the  Commission,  and  the  Commission,  in  making 
its  findings,  has  not  only  ascertained  the  amount  of  money  expended, 
the  amount  of  money  necessary  to  duplicate  or  reproduce  the  property, 
but,  in  addition  thereto,  has  ascertained  every  unit  quantity  such  as  the 
number  of  cubic  yards  of  earth,  solid  rock,  hard  pan,  loose  rock, 
cemented  gravel  and  other  grading  quantities  necessary  to  be  moved, 
together  with  the  necessary  overhaul  connected  therewith,  the  number 
of  tons  of  steel  in  the  rails,  the  track  fastenings,  ties,  iron  and  timber  in 
bridges,  the  floor  area  of  all  buildings  and  every  unit  quantity  entering 
into  the  construction.  To  these  units  current  prices  can  at  any  time  be 
applied  and  the  cost  of  reproduction  under  the  conditions  then  existing 
ascertained  without  any  material  expense,  pro\dded  the  Commission, 
from  time  to  time,  will  have  a  further  hearing  to  ascertain  the  nature  of 
the  improvements  placed  upon  the  property  subsequent  to  the  date  of 
our  findings  and  make  supplementary  findings  of  fact  concerning  the 
same."^ 

Mr.  H.  P.  Gillette  had  practical  charge  for  the  Commission  of 
the  organization  which  collected  the  data,  determined  unit 
prices  and  submitted  the  values  on  which  the  Commission  has 
based  its  decisions. 

One  of  the  most  interesting  and  complete  valuations  made  by 
this  Commission  is  that  of  the  property  of  the  Northern  Pacific 
Railway  in  the  State  of  Washington  which  the  Commission 
found  aggregated  687.68  miles  of  main  hne  and  941.75  miles 
of  branches  and  spurs,  a  total  of  1629.42  miles.  The  original 
cost  of  the  property  to  the  Railroad  Company  including  improve- 
ments and  betterments  up  to  June  13,  1906,  as  determined  by 
Mr.  Gillette  are  given  in  Table  I  which  is  based  on  a  mileage  as 
found  by  him  of  1645,  being  slightly  in  excess  of  the  figure  used 
by  the  Commission. 

The  cost  of  reproduction  as  estimated  by  Mr.   Gillette  and 

1  Second  and  Third  Annual  Reports  of  The  Railroad  Commission  of 
Washington,  page  129. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      375 

substantially  accepted  and  adopted  in  its  findings  by  the  Com- 
mission, is  given  in  Tables  III  and  IV.  The  Commission  found 
"the  cash  market  value  of  the  property  on  the  thirtieth  day  of 
June,  1906"  based  on  the  cost  of  reproduction  and  not  including 
real  estate  and  equipment,  to  be  $55,475,827.25.  The  value  of 
the  real  estate  used  or  necessary  for  the  immediate  future  was 
found  to  be  $32,862,872,  a  total  for  the  entire  property  of 
$88,338,699.25.  The  Commission  disregarded  the  400  ft.  right 
of  way  owned,  and  allowed  only  for  a  100  ft.  strip,  as  being  all 
that  was  necessary. 

Based  on  actual  costs,  which  amounted  to  about  5  per  cent., 
Mr.  Gillette  allowed  5  per  cent,  for  engineering,  in  his  estimated 
cost  of  reproduction.  The  Commission  overruled  this,  however, 
and  allowed  only  3  1/2  per  cent,  for  this  item,  the  same  as  is 
uniforml}'  used  for  all  railroads  in  that  State. 

The  cost  of  reproduction  was  found  by  ascertaining  the  original 
cost  and  adding  from  15  to  20  per  cent,  to  cover  increased  price 
of  labor  and  material.  Present  or  depreciated  value  was  found 
by  estimating  theoretical  depreciation  at  the  rate  of  3.6  percent, 
per  annum  and  deducting  this  amount  from  the  cost  of  repro- 
duction new.  For  further  information  regarding  the  method 
of  determining  depreciation,  see  Chapter  ^TII  under  "Fifty 
per  cent,  method." 

The  cost  per  mile  of  the  Northern  Pacific  Railroad  in  Wash- 
ington will  be  found  high  compared  with  many  other  roads, 
but  this  is  due  principallj^  to  the  rugged  character  of  the  country 
which  necessitated  many  tunnels  and  other  similar  expensive 
construction.  The  original  cost  shown  in  Table  I  discloses  a 
particularly  large  amount  for  "interest  and  discount,"  but  the 
Commission  found  that  the  Company-,  owing  to  the  "  pioneer 
work"  done  during  its  construction,  had  to  pay  high  rates  of 
interest  and  sell  its  securities  at  large  discounts,  in  one  instance 
bonds  to  the  amount  (par  value)  of  $2,500,000.00  having  been 
sold  at  70  per  cent,  discount. 

Some  of  the  more  important  unit  prices  used  were  as  follows: 

Clearing,  $100.00  per  acre;  grubbing,  $22.00  per  acre;  earth 
excavation  or  embankment,  22  cents  per  yard;  solid  rock,  $1.10 
per  yard;  rip-rap,  $1.10  per  yard;  slope  wall,  $2.50  per  yard; 
timber  cribs,  $26.00  per  thousand  feet  board  measure;  ties, 
50  cents  each;  rails,  $40.00  per  ton;  spikes,  2.08  cents  per  pound; 
bolts,  3.2  cents  per  pound;  tie  plates,  8  cents  each;  switches, 


376 


VALUATION  OF  PUBLIC  UTILITIES 


$80.00  each;  ballast  from  S600.00  to  SlOOO.OO  per  mile;  track 
laying  and  surfacing  (excluding  train  service),  $700.00  per  mile; 
passenger  depots  per  square  foot,  frame  SI. 25,  brick,  S4.00; 
engine  houses,  frame  75  cents  per  square  foot,  brick  SloOO.OO 
per  stall;  machine  shops  and  car  houses,  frame  50  cents  per 
square  foot,  brick  $2.90  per  square  foot;  section  houses,  SI. 25 
per  square  foot.^ 

TABLE  I.»     ORIGINAL  COST  OF  THE  NORTHERN  PACIFIC  RAIL- 
WAY IN  WASHINGTON  PLUS  IMPROVEMENTS 
(1645  Miles  of  Line) 


Total 


Per  mile 
of  line 


Engineering 

Right  of  way 

Real  estate 

Clearing  and  grubbing 

Grading 

Tunnels 

Bridges,  trestles  and  culverts. 

Masonrj- 

Ties 


Rails 

Track  fastenings 

Frogs  and  switches 

Track  la>ing  and  surfacing 

Ballast 

Station  buildings  and  fixtures 

Engine  houses  and  turntables 

Engine  and  car  shops 

Shop  machinery  and  tools 

Water  stations 

Fuel  stations 

Fencing  right  of  way 

Snow  fences,  etc 

Stock  yards 

Crossings,  cattle  guards  and  signs 

Interlocking  and  signal  apparatus 

Docks,  wharves  and  coal  bunkers. 

Transfer  boats  and  bargers 

Section  and  tool  houses 

Miscellaneous  structures 

Telegraph  lines 

Transportation  charges  and  rent  of  equipment. 

Operating  expenses 

Construction  equipment 

General  expenses 

Interest  and  discount 

Legal  expense .- 

Undistributed  expense 

Total 

Equipment  (rolling  stock) 

Grand  total 


8  2,907,344. 

1,796,272, 

1,360,895. 

1,213,770, 

15,589,712. 

974,519 

7,879,328 

156,823 

2,278,007 

8,520,625 

1,063,620 

255,243 

1,669,691 

1,524,759 

1,477,207 

246,663 

849,340 

294,507 

325,042 

79,544 

273,067 

130,494 

31,064 

101,860 

44,706 

1,015,566 

31,662 

122,352 

1,179,108 

207,361 

1,756,796 

261,910 

63,743 

640,744 

7,173,190 

3,009 

480,212. 


$63,979,772 
11,478,121 


S  1,768 

1,092 

827 

738 

9,479 

590 

4,790 

95 

1,385 

5,182 

647 

155 

1,015 

929 

897 

150 

516 

179 

198 

47 

166 

79 

19 

62 

27 

617 

19 

74 

717 

126 

1,068 

159 

39 

390 

4,360 

2 

292 


538,895 
6,978 


$75,457,893 .  99         845,873 


^Engineering-Contracting,  Volume  XXXIII,  No.  2. 


EXAMPLES  OF  IMPORTANT  APPRAISALS      377 


TABLES  III  AND  IV.  ^     COST  OF  REPRODUCTION  AND  PRESENT 

VALUE  OF  THE  NORTHERN  PACIFIC  RY.  IN 

WASHINGTON 

(1645  Miles) 


Cost  of  re- 
production 


Per  mile 
of  line^ 


Engineering  (5  per  cent,  of  items 
No.  3  to  No.  27.) 

Right  of  way,  etc 

Clearing  and  grubbing 

Grading 

Tunnels 

Bridges,  trestles  and  culverts.  . .  . 

Ties 

Rails 

Track  fastenings 

Frogs  and  switches 

Ballast 

Track  laying  and  surfacing 

Fencing  right  of  way.  ]  From  ac- 

Snow  fences  and  sheds.   I  counting 

Crossings,  cattle  >•  records 
guards  and  signs.        |  plus  20 

Telegraph  lines  J  per  cent. 

Station  buildings  and  fixtures. . . . 

Engine  houses  and  turntables. . . . 

Engine  and  car  shops 

Shop  machinery  (from  accounting 
records  plus  20  per  cent.) 

Water  stations  (from  accounting 
records  plus  20  per  cent.) 

Fuel  stations  (from  accounting 
records  plus   20  per  cent.)  .  .  .  . 

Stock  yards  (from  accounting 
records  plus  20  per  cent 

Interlocking  and  signal  appa- 
ratus (from  accounting  records 
plus  20  per  cent.) 

Docks,  wharfs  and  coal  bunkers 
(from  accounting  records  plus 
20  per  cent.). 

Section  and  tool  houses 

Miscellaneous  structures  (from 
accounting  records  plus  20  per 
cent.) 

Legal  and  general  expense  (1  per 
cent,  of  it«ms  No.  3  to  No.  27). 

Interest  during  construction  (5 
per  cent,  of  items  No.  1  to  No. 
28  except  No.  2) 

Stores  on  hand 

Total  of  items  1  to  30 

Equipment 


2,510,580 

32,862,872 

1,427,185 

12,543,395 

3,143,030 

7,776,348 

3,307,875 

8,854,680 

1,704,583 

228,000 

1,981,000 

1,543,675 

227,682 

156,595 

122,232 

248,835 

2,109,895 

227,819 

939,984 

353,408 

390,050 

95,4.53 

30,170 

.53,648 


1,216,680 
146,853 


1,382,530 


502,116 


2,661,215 
530,677 


100.0 

100.0 

100.0 

110.0 

100.0 

84.7 

50.0 

80.0 

80.0 

80.0 

100.0 

100.0 

55.0 

72.0 

55.0 
75.0 
81.5 
68.2 
66.4 

65.0 

65.5 

77.5 

45.5 

85.0 


75.0 
61.0 


61.0 
100.0 


100.0 
100.0 


$  89,279,065 
14,334,377 


5  2,510,580 

32,862,872 

1,427,185 

13,797,735 

3,143,030 

6,586,.567 

1,653,938 

7,083,744 

1,363,666 

182,400 

1,981,000 

1,543,675 

125,255 

112,748 

67,228 

186,626 

1,727,769 

155,373 

624,169 

299,715 

255,483 

73,976 

13,727 

45,601 


912,510 
89,580 


843, .343 
502,116 


2,661,215 
530,677 


S  1,526 

19,980 

867 

7,626 

1,911 

4,728 

2,011 

5,384 

1,036 

139 

1,206 

938 

138 

96 

74 

151 

1,283 

138 

571 

215 

237 

58 

IS 

33 


740 
89 


67.5 


$83,363,454 
9,677,947 


840 
305 


1,618 

322 

$54,277 

8,715 


Grand  total. 


$103,613,442 


$93,041,401 


$62,992 


^Engineering-Contracting,  Volume  XXXIII,  No.  2. 
^  There  are  1.34  miles  of  track  per  mile  of  line. 


378  VALUATION  OF  PUBLIC  UTILITIES 

Beloit  Water  Gas  and  Electric  Co. — Among  the  many  examples 
that  might  be  used  to  illustrate  the  methods  of  valuation  em- 
ployed by  the  Wisconsin  Commission,  the  case  of  the  Beloit 
Company  has  been  selected  because: 

(a)  It  includes  several  classes  of  property,  water  works,  water 
power,  gas  properties  and  electric  plant. 

(b)  It  discloses  some  of  the  latest  approved  unit  prices  and 
method  of  their  make-up  as  used  by  the  Commission  in  com- 
parison with  similar  prices  introduced  by  various  engineers. 

(c)  It  indicates  the  latest  views  of  the  Commission  re-affirming 
in  many  instances,  previous  methods  used  in  determining  "fair 
value"  with  due  consideration  of  working  capital,  ''earning 
value,"  etc. 

The  city  of  Beloit,  Wisconsin,  appealed  to  the  Railroad  Com- 
mission of  Wisconsin  for  a  reduction  in  rates  of  water,  gas  and 
electric  service  supplied  by  the  local  company.  Careful  and 
exhaustive  appraisals  of  the  properties  of  the  company  were 
made,  not  only  by  the  engineers  of  the  Commission  but  also  by 
several  different  engineers  employed  by  the  city  and  by  the 
company.  As  indicating  the  care  with  which  the  work  was  done 
and  to  permit  a  comparison  of  the  units  and  values  used  by  the 
several  engineers  and  the  Wisconsin  Commission  in  determining 
facts  on  which  to  base  their  decisions,  a  part  of  the  data  contained 
in  the  decision -of  the  Commission,  dated  July  19,  1911,  is  here 
reproduced. 

The  Commission  found  that  the  rates  charged  were  not  pro- 
portioned in  accordance  with  the  cost  of  the  service,  and,  there- 
fore, ordered  the  introduction  of  water-meters  and  modification 
in  the  charges  for  water,  gas  and  electric  service.  The  cost  of 
reproduction  new  of  the  entire  physical  property  was  found  to 
be  $894,204.00;  and  the  present  value  $815,902.00,  no  allowance 
being  made  for  pavement  not  being  actually  cut  through  and 
paid  for  by  the  company.  The  value  of  the  gas  plant,  new,  was 
found  to  be  $321,380,  existing  value  $300,609;  but  the  value 
allowed,  all  things  considered,  was  $310,000.  In  the  same  way 
the  value  of  the  electric  plant,  new,  was  found  to  be  $264,883, 
existing  value  $225,772;  but  the  total  value  allowed  including 
part  of  the  water  power,  was  $270,000.  Methods  of  evaluating 
water  powers  are  discussed,  in  the  printed  opinion,  at  considerable 
length,  the  Commission  stating  "it  appears  that  it  is  almost 
always  necessary  to  fall  back  upon  the  method  of  calculating  the 


EXAMPLES  OF  IMPORTANT  APPRAISALS      379 

saving  over  steam  power  and  then,  by  capitalizing  this  saving, 
arrive  at  the  total  value  of  the  water  power.'"  Yet  the  Com- 
mission apparently  makes  no  such  allowance,  saying: 

"From  the  point  of  view  of  public  policy  it  is  questionable  whether 
the  allowance  should  exceed  the  cost  of  development  and  value  of  the 
physical  property  utilized,"  apparently  basing  this  conclusion  on  the 
position  taken  in  an  earlier  case  where  the  Commission  said :  "If  water 
rights  are  private  property  under  the  law,  then  all  the  benefits  which 
accrue  from  these  rights  would  probably  go  to  their  private  owners.  If, 
on  the  other  hand,  water  power  rights  are  public  rights  rather  than 
private  rights,  then  it  would  also  seem  that  the  public  should  share  in 
any  benefits  that  may  be  derived  from  such  rights." 

Apparently  little  or  nothing  was  allowed  for  going  value,  the 
basis  for  such  conclusion  being  the  "earning  value,"  the  method 
of  determining  which,  in  line  with  previous  decisions,  from  a  con- 
sideration of  early  losses  is  clearly  set  forth  in  Table  XXXVII. 
Working  capital  including  stores  and  supplies  on  hand,  was 
allowed  to  the  extent  of  $40,000.00,  that  is,  practically  5  per  cent, 
of  the  present  physical  value.  The  usual  addition  of  12  per  cent, 
was  made  to  the  net  cost  of  the  physical  plant  aside  from  paving, 
stores  and  supplies,  to  cover  engineering,  interest  during  construc- 
tion, contingencies,  organization,  etc.  Prices  for  material  were 
largely  made  up  by  ascertaining  market  values,  using  the  average 
price  over  a  5  year  period,  in  case  of  commodities  fluctuating  in 
value,  adding  freight  and  costs  of  delivery  at  the  site  where  used; 
then  making  a  rather  liberal  allowance  for  estimated  cost  of  labor 
of  installation.  In  some  instances  the  general  contractor's  price 
for  ecpiipment  delivered  and  erected  ready  for  operation  was  taken 
as  the  unit  price,  thus  including  the  contractor's  allowance  for 
profit  and  contingencies,  on  top  of  which  was  further  added  the 
12  per  cent,  covering  engineering,  additional  contingencies,  etc., 
in  fact  the  unit  prices  usually  adopted  by  the  Wisconsin  Com- 
mission are  sufficiently  liberal,  as  stated  in  this  and  other 
decisions,  to  cover  "piecemeal"  construction  which  would 
ordinarily  include  a  contractor's  profit  as  compared  with  the 
unit  prices  used  in  many  cases  by  other  commissions  or  appraisers 
in  estimating  reproduction  values  based  on  complete  replace- 
ment at  a  given  time. 

Table  XLV  gives  an  interesting  comparison  of  the  investment 
in  the  relative  parts  of  gas  plants,  as  found  by  the  Wisconsin 
Commission  for  towns  in  that  state. 


380 


VALUATION  OF  PUBLIC  UTILITIES 


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EXAMPLES  OF  IMPORTANT  APPRAISALS      381 


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year 

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VALUATION  OF  PUBLIC  UTILITIES 


TABLE  XII.— COMPARATIVE  TABLE  OF  WEIGHTS  OF  CAST  IRON 

PIPE 


City 


Wheeler       Sturtevant       Evans       Fowle 


Staff 

Class 

B 


Com- 
pany 


14",  lb.  per  lineal  foot. . 
12",  lb.  per  lineal  foot. . 
10",  lb.  per  lineal  foot. . 

8",  lb.  per  lineal  foot. . 

6",  lb.  per  lineal  foot. . 

4",  lb.  per  lineal  foot. . 

3",  lb.  per  lineal  foot. . 


102. 
75 
60 
42 
33 
22 
17 


117 
75 
60 
42 
33 
22 
16.2 


100 
75 
60 
42 
33 
22 
17 


117 
75 
60 
42 
33 
22 
17 


102.5 
82.1 
63.8 
47.5 
33.3 
21.7 
16.2 


102.5 

82.1 
63.8 
47.5 
33.3 
21.7 
16.2 


TABLE  XIII.— COMPARATIVE  TABLE  OF  COST  OF  TRENCHING 
AND  LAYING  MAINS 


City 

Staff 

Wheeler 

Sturte- 
vant 

Evans 

Fowle 

City 
average 

Com- 
pany 

14-inch  cast  iron  main,  per  ft. .  . 

$0,470 

$0,460 

$0,425 

$0,420 

$0,444 

$0,580 

$0,603 

12-inch  cast  iron  main,  per  ft.  . 

.420 

.410 

.382 

.380 

..398 

.535 

.547 

10-inch  cast  iron  main,  per  ft.  . 

.370 

.360 

.334 

.340 

.351 

.485 

.498 

8-inch  cast  iron  main,  per  ft.  . 

.330 

.325 

.290 

.300 

.311 

.4.35 

.437 

6-inch  cast  iron  main,  per  ft.  . 

.280 

.270 

.255 

.260 

.266 

.405 

.405 

4-inch  cast  iron  main,  per  ft.  . 

.250 

.245 

.220 

.230 

.236 

.370 

.370 

3-inch  cast  iron  main,  per  ft.  . 

.230 

.225 

.212 

.210 

.219 

..350 

.3.50 

3-inch  wrt.  iron  main,  per  ft. . 

.250 

.200 

.225 

.315 

.185 

.185 

.305 

.180 

.180 

.300 

.175 

.175 

.300 

EXAMPLES  OF  IMPORTANT  APPRAISALS      383 
TABLE  XIX.— COMPARISON  OF  HOLDER  VALUES 


Classification 


City 


Evans       Fowie 


Reproduction  Value 

Tank  of  56,000  cu.  ft.  holder 

Metal  work  of  same 

Foundation  of  300,000  cu.  ft.  holder 

Metal  work  of  same 

Water  in  tank  of  same 

Total  reproduction  value 

Present  Conditions — Per  Cent 

Tank  of  56,000  cu.  ft.  holder 

Metal  work  of  same 

Foundation  of  300,000  cu.  ft.  holder 

Metal  work  of  same 

Present  Values 

Tank  of  56,000  cu.  ft.  holder 

Metal  work  of  same 

Foundation  of  300,000  cu.  ft.  holder 

Metal  work  of  same 

Water  in  tank  of  same 

Total  present  value 


$3,100 
4,000 
2,250 

26,800 
123 


836,273  $34,873 


$4,000 
4,200 
2,550 

24,000 
123 


80 

80 

100 

100 


$2,480 
3,200 
2,250 

26,800 
123 


$34,853 


$2,800 
2,940 
2,499 

23,520 
121 


$31,880 


Staff 


$5,600 
4,200 
2,800 

29.500 
123 


$42,223 


83 

83 

100 

100 


$4,648 
3,524 
2,800 

29,500 
123 


$40,595 


Com- 
pany 


$9,245 
4,200 
2,650 

30,000 
162 


$46,257 


85 

85 

100 

100 


$7,866 
3,623 
2,650 

30,000 
162 


$44,301 


TABLE  XXL— GAS   DEPARTMENT,    DISTRIBUTION   SYSTEM 
Price  of  Cast  Iron  Pipe 


Classification 


City 


Evans 


Fowle        Average 


Staff 


Company 


8  in.  main  per  ton 
6  in.  main  per  ton 
4  in.  main  per  ton 
3  in.  main  per  ton 

Specials 

Cartage  per  ton.  .  , 


$29.80 
29.80 
30.80 
30.80 
50.00 
.50 


$29.31 
29.31 
30.31 
30.31 
60.00 
(1) 


S29.55 
29.55 
30.55 
30.55 
55.00 
.50 


$30.48 
30.49 
31.47 
31.47 
60.00 
.50 


$30.90 
30.01 
31.99 
31.99 
60.00 
.75 


'•50  cents,  per  ton  included  in  unit  price. 


384 


VALUATION  OF  PUBLIC  UTILITIES 


TABLE  XXII.— GAS  DEPARTMEXT,  DISTRIBUTION 
SYSTEM 

Price  of  Wrought  Iron  Pipe 


Classification 


City 


Staff 


Com- 
pany 


Evans     Fowle    Average 


8  in.  W.  I.  pipe,  per  foot SO. 85 


$0,846    SO. 85 


3  in.  W.  I.  pipe,  per  foot 19  .189         .1895;  .204 

2  in.  W.  I.  pipe,  per  foot .09     I        .090         .090,  .108 

2  in.  Merchants'  pipe,  per  foot | i  .972 

1^  in.  Merchants' pipe,  per  foot .068}        .068]        .068  {  .0729 

1  i  in.  Merchants'  pipe,  per  foot .0566         .056         .056  .0608 

1  in.  Merchants'  pipe,  per  foot .0415         .041         .041  .0446 

Specials  and  fittings,  per  ton 159.00  i 90.00 


.204 

.123 

.973 

.0729 

.0608 

.0446 


Freight  and  cartage i  1 .50 


1.50 


1.50 


1.50 


1.75 


TABLE  XXIIL— GAS     DEPARTMENT,     DISTRIBUTION     SYSTEM 


City 


Sturte-     j.^,^Qg  j  Fo^ie 
vant     ( 


Average 


Staff 


Com- 
pany 


Cost  of  Trenching  and  Laying 

Maixs  I 

cast  iron  pipe,  per  foot SO. 245 

cast  iron  pipe,  per  foot .220 

cast  iron  pipe,  per  foot |        .200 

cast  iron  pipe,  per  foot .175 

wrought  iron  pipe,  per  foot 

wTOught  iron  pipe,  per  foot j        .140 

wrought  iron  pipe,  per  foot ,        .  125 


$0 


192  SO. 20 
169  [  .17 
137  1  .15 
1325       .14 


SO. 212 
.186 
.162 
.149 


'  wrought  iron  pipe,  per  foot. 
'  wrought  iron  pipe,  per  foot, 
wrought  iron  pipe,  per  foot. . 


.115 
.115 


.1056 
.0900 
.0875 
.0845 
.0820 


.115 
.100 
.095 
.090 
.090 


Trenching  and  Laying  Services 

2"  wrought  iron  pipe,  per  foot | ISO. 086 

1  J"  wrought  iron  pipe,  per  foot i I      .084 

li"  wrought  iron  pipe,  per  foot I .082 

1"  wrought  iron  pipe,  per  foot .080 

I"  wrought  iron  pipe,  per  foot (      .080 


$0,090 
.090 
.085 
.085 
.085 


.120 

.105 

.099 

.0965 

.086 


$0,088 
.087 
.084 
.082 
.082 


$0,355  $0,374 
.285  .317 
.240  .256 
.220       .223 

.250[ 

.175  .188 
.165  .175 
.165!  .170 
.1601  .170 
.160       .170 


S0.145jS0.16 
.14o|  .16 
.140j  .16 
.135  .16 
.I35I      .16 


EXAMPLES  OF  IMPORTANT  APPRAISALS      385 


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INDEX 


I 


Application  of  depreciation,  196 
of  principles  outlined,  154 
of  terms,  13 
Appraisals  of  public  utility  proper- 
ties in  Greater  New  York, 
218 
of  steam  roads  in  Michigan,  370 
Appreciation,  210 
Assumptions  as   to   existing  plant, 

154 
Averages,  29 

Basis,  9 

Beloit  Water,  Gas  &  Electric  Co., 
378 

Beginning  of  operation,  155 

of  different  portions  of  com- 
parative plant,  158 

Chapter  I,  1 
Chapter  II,  13 
Chapter  III,  32 
Chapter  IV,  49 
Chapter  V,  62 
Chapter  VI,  91 
Chapter  VII,  129 
Chapter  VIII,  168 
Chapter  IX,  218 
Chapter  X,  333 

Character  of  plant  and  order  of  con- 
struction, 155 
Class  of  depreciation,  23 
Commission  decisions: 

Appraisal  of  steam  railroads  in 

Michigan,  370 
Beloit  Water,  Gas  &  Electric  Co. 

R.  R.  Com.  of  Wis.,  378 
Buffalo,  Rochester  &  Eastern, 
P.    S.    C,    N.    Y.,    Second 
District,  113 
Case    74,     Binghamton    Light, 
Heat  &  Power  Co.,  P.  S.  C, 


N.  Y.,  Second  Dstrict,  7, 
41 

Case  351,  Monheimer  vs.  Brook- 
lyn Union  Elevated  Co., 
etc.,  P.  S.  C,  N.  Y.,  First 
District,  94,  117 

Case  420,  Coney  Island  and 
Brooklyn  Railroad  Co., 
P.  S.  C,  N.  Y.,  First  Dis- 
trict, 119 

Case  1134,  Coney  Island  and 
Brooklyn  R.  R.  Co.,  P.  S. 
C,  N.  Y.,  First  District,  293 

Case  1181,  Third  Ave.  R.  R. 
Co.,  P.  S.  C,  N.  Y.,  First 
District,  9,  84,  92,  115,  220, 
260,  261,  270 

Case  1260,  Baltz  vs.  Brooklyn 
Borough  Gas  Co.,  210 

Case  1273,  Mayhew  vs.  Kings 
County  Lighting  Co.,  P.  S. 
C,  N.  Y.,  First  District, 
86,  115,  126,  167,  210, 
301 

Case  1305,  MetropoUtan  Street 
Railway  Co.,  P.  S.  C,  N. 
Y.,  First  District,  280 

Case  1364,  Third  R.  R.  Co., 
P.  S.  C,  N.  Y.,  First  Dis- 
trict, 272 

Cashton  Light  &  Power  Co., 
R.  R.  Com.  of  Wisconsin, 
138 

City  of  Dodgeville  vs.  Dodge- 
\411e  Electric  Light  &  Pow- 
er Co.,  R.  R.  Com.  of  Wis., 
26,  198 

City  of  Knoxville  vs.  Knoxville 
Water  Co.,  141,  207,  209 

City  of  Ripon  vs.  Ripon  AVater 
'  Co.,  R.  R.  Com.,  of  Wis- 
consin, 114 


387 


388 


INDEX 


Contingencies,  67 
Cunningham  vs.  Chippewa  Falls 

Water  Works   &  Lighting 
•  Co.,   R.   R.   Com.   of  Wis- 
consin, 23 
Darlington    Electric    Light     & 

Water   Power    Co.,  R.    R. 

Com.  of  Wis.,  204 
Decisions   of  commissions    (see 

Commission  Decisions) 
Decision  of   courts    (see   Court 

Decisions) 
Fair  return,  20 
Fair  value,  20 
Fair  rate,  fair  value,  fair  return, 

20 
Fon  du  Lac  Water  Co.,  R.  R. 

Com.  of  Wisconsin,  119 
Franchises,     good    will,     going 

value,  contracts,  129 
Fullmer  vs.  Wausau  Street  R. 

R.  Co.,  R.  R.  Com.  of  Wis- 
consin, 172 
Hill  vs.  Antigo  Water  Co.,  R.  R. 

Com.  of  Wisconsin,  97,  118, 

146,  148,  172 
Income  on  unemployed  capital, 

160 
Index,  387 
Kaukauna  Gas,  Electric  Light 

&  Power  Company,  R.  R- 

Com.  of  Wis.,  89 
Kennebec    Water    District    vs. 

Waterville,  139 
Long    Acre    Electric    Light    & 

Power  Co.,  P.  S.  C,  N.  Y., 

First  Dist.,  41 
Macon  Gas,  Light  &  Water  Co., 

Georgia  Board  of  Arbitra- 
tors, 349 
MetropoHtan     Trust     Co.,     vs. 

Houston  &T.C.  R.  R.  Co., 

141 
MinneapoUs,   St.  Paul  &  Sault 

Ste.    Marie     Railway     Co. 

vs.    Railroad    Commission 

of  Wisconsin,  39 
Monheimer  vs.  Coney  Island  and 

Brooklyn  Railroad  Co.,  P. 


S.  C,  N.  Y.,  First  District, 
96,  98 
Northern    Pacific   Railway,    R. 
R.  Com.  of  Washington,  374 
Omissions,  67 

Paulhaumus    vs.    Puget    Sound 
Electric  Railway,  Railway 
Com.  of  Wash.,  121 
Queensborough  Gas  &  Electric 
Co.,  P.  S.  C,  N.  Y.,  First 
District,  93,  121 
Rates    for    Electric    light    and 
power,  P.  S.  C,  St.  Louis, 
210 
Reserve  funds,  193 
Rochester,      Corning,      Elmira 
Traction  Co.,  P.  S.C.,N.Y., 
First  District,  95 
State  Journal  Printing  Co.   vs. 
Madison    Gas    &    Electric 
Co.,  9,  82,  84,  97,  115,  127 
Street    railway    properties     in 
Chicago,  traction  commis- 
sion, 333 
Union  Electric  Light  &  Power 
Co.,  St.  Louis  P.  S.  C,  345 
Coney  Island  &  Brooklyn  R.  R.  Co., 

293 
Construction  period  required,  155 
Contractor's  profit,  64 
Contracts,  129,  166 
Cost  of  appraisals,  52 
of  financing,  118 
Cost   to   replace   new,    replacement 
cost  or  cost  of  reproduc- 
tion, 18 
Court  decisions: 

Ames   vs.    Union   Pacific    Rail- 
way Co.,  205 
Binghamton    Light,     Heat     & 
Power  Co.  vs.  Stevens,  200 
Bristol  vs.  Bristol  Water  Works, 

139 
Brunswick  and  Topsham  Water 
District  vs.  Maine  Water 
Co.,  17,  110 
Cedar  Rapids  Gas  Light  Co.  vs. 
City  of  Cedar  Rapids,  17, 
84 


INDEX 


389 


City  of  Danville  et  al.  vs. 
Southern  Railway  Co.  et  al., 
123 

Cleveland,  Cincinnati,  Chicago 
&  St.  Louis  Railway  Co. 
vs.  Backus,  51 

The  Columbus  Railway  & 
Light  Co.  vs.  City  of  Co- 
lumbus, Circuit  Court  of 
the  U.  S.  Southern  District 
of  Ohio,  Eastern  Division, 
5,  98,  119,  172,  199 

Columbus  Southern  Railroad 
vs.  AVright,  72 

Consolidated  Gas  Co.  vs.  City 
of  Xew  York,  73,  125,  129, 
131,  136.  206 

Cotting  vs.  Kansas  City  Stock 
Yards,  11,  73,  210 

Covington  and  Lexington  Turn- 
pike vs.  Sanford,  21 

Des  Moines  Water  Co.  vs.  City 
of  Des  Moines,  91 

Hamilton  Gas  Co.  Ltd.  vs. 
Mayor,  Councillors  and  Bur- 
gesses, 142,  143 

Milwaukee  Railway  &  Electric 
Light  Co.  vs.  City  of  Mil- 
waukee, 8.  128,  204 

M.  K.  &  T.  Railway  Co.  vs. 
Love,  142 

Omaha  vs.  Omaha  Water  Co., 
28,  138,  141,  172 

Perth  Gas  Company  Ltd.  vs. 
Mayor  &  Councillors,  143 

Pioneer  Telephone  &  Telegraph 
Co.  vs.  Westenhaven,  110, 
150 

Smyth  vs.  Ames,  9,  86 

Weatherly  vs.  Capital  City 
Water  Co.,  28 

Wilcox  vs.  Consolidated  Gas  Co., 
18,  87,  130,  138 

Date  of  valuation,  155 

Depreciation,  22,  168 

accounts  or  reserve  funds,  193 
of  non-physical  values,  215 

Development  expenses,  19,  91 


intangible  expenses,  non-phy- 
sical costs,  overhead  ex- 
penses, 91 

Engineering,  contingencies,  omis- 
sions, etc.,  67 

Examples  of  important  appraisals, 
333 

Field  inspection,  57 

Fifty  per  cent,  method,  211 

Figure  1,  66 

Figure  2,  66 

Figure  3,  149 

Figure  4,  154 

Figure  5,  170 

Figure  6,  178 

Figure  7,  202 

Figure  8,  352 

Fluctuating  prices,  65 

Franchises,  22,  129 

General,  49,  91,  168 
Going  value,  26,  139 

development  period,  155 
Good  \xi\\,  21,  129,  137 

Insurance,  116 
Intangible  expenses,  91 
Interest,  110 
Introduction,  1 
Inventory,  54 

Kings  County  Lighting  Co.,  301 

Legal    and    organization    expenses, 

116 
Loss  of  interest  during  construction, 

158 

Macon  Gas  Light  &  Water  Com- 
pany, Georgia,  349 

Making  an  appraisal,  49 

MetropoHtan  Street  Railway  Com- 
pany, 280 

New  construction  in  going  value 
development  period  ig- 
nored, 159 


390 


INDEX 


Non-existent  property,  127 
Non-physical  costs,  91 
Northern  Pacific  Railway,  State  of 
Washington,  374 

Operations  of  comparative  plant, 
160 

of  existing  plant,  159 
Original  cost,  18 
Overhead  expenses,  91 

Paving,  83 

Physical  value,  14 

Preface,  v 

Present  value,  16 

Public  service  commissions,  32 

Public  utiUty,  28 

Purpose,  6 

Real  estate,  71 

Reasons  for  the  Creation  of  commis- 
sions, 36 

Replacement  cost,  18 

Reproduction  cost,  18 

Resulting  going  value  under  first 
trial  computation,  163 

Results  accomplished  by  commis- 
sions, 40 

Scrap  value,  15 

Service  value,  16 

Street  railway  properties  in  Chicago, 

333 
Structural  costs,  62 
Suggested  procedure,  59 
Summary,  216 
of  units,  224 


Table  I,  General  statistics  relating 
to  assumed  waterworks 
plant,  156 

Table  II,  Interest  during  construc- 
tion    and     progressive 
amount  of  investment,  157 

Table  III,  Comparative  plant,  158 

Table  IV,  Existing  plant,  159 

Table  V,  Comparative  plant,  160 

Table  VI,  First  trial  computation 
of  net  annual  income  of 
comparative  plant,  161 

Table  VII,  First  trial  going  value 
computation  as  of  Jan.  1, 
1910,  162 

Table  VIII,  Accumulation,  180 

Table  IX,  Annuity,  184 

Table  X,  Approved  rates  used  in 
estimating  theoretical  de- 
preciation, 188 

Table  XI,  Comparative  methods  of 
caring  for  depreciation,  195 

Table  XII,  Rates  of  depreciation  in 
use,  199 

Table  of  contents,  vii 

Taxes,  115 

Third  avenue  railroad  company,  218 

Union  Electric  Light  &  Power  Co., 

St.  Louis,  Mo.,  345 
Unit  prices,  62 
Utility  commissions,  32 

Value,  13 

Water  power,  87 
Wearing  value,  15 
Working  capital,  125 


